It offers a fresh start, but can cost a lot of time and money.
Chapter 11 bankruptcy is a way for businesses — and, more rarely, individuals — to become leaner and stronger by restructuring their finances under the protection of the courts while pausing interest rates and creditor calls.
How does Chapter 11 bankruptcy work?
Chapter 11 is considered a flexible and diverse form of bankruptcy, so it’s hard to generalize across cases.
Most companies file for Chapter 11 in the state they’ve set their business up in. The company becomes what’s called a debtor in possession. This identity allows it to run the business as usual for up to four months while working with creditors to negotiate new terms on its debt.
The court protects the company as it’s putting together a reorganization plan while maintaining its assets. During this time, an automatic stay is in effect, preventing creditors from repossessions, foreclosures and collections against the business.
If the reorganization plan is approved, debts are handled according to what the court considers the best interests of the creditors, which is negotiated case by case. Though most debts are at least partially discharged, some companies that file for Chapter 11 decide to pay the debt in full to maintain healthy business relationships with its creditors.
When is Chapter 11 bankruptcy right for me?
Generally, when an individual files for Chapter 11 bankruptcy, it’s because they’re looking to liquidate assets or their debt amount exceeds what’s allowed in Chapter 13.
Otherwise, more often it’s businesses that file for Chapter 11 bankruptcy. These businesses are often in financial distress and need time to restructure without the pressure of debt collectors and rapidly accumulating interest.
Note that filing for Chapter 11 can risk not only a company’s reputation but also the health of business relationships. It’s also expensive: You’ll pay about $1,700 in court and administrative fees to file your claim, as well as a quarterly trustee fee that can range from $325 to $30,000, depending on your case.
However, for a company that’s weighed down with insurmountable debt and an unsustainable business model, bankruptcy might provide the time necessary to set their financial path straight for the future.
How to file for Chapter 11 bankruptcy
Filing for Chapter 11 involves paperwork, court time and a hearty dose of stick-with-it-ness.
- Complete the paperwork.
Detailed financial paperwork is required, including schedules of income, business or individual expenses and your tax history. - File a petition.
Companies must complete a Voluntary Petition for Non-Individuals Filing Bankruptcy form, while individuals work with the Voluntary Petition for Individuals Filing for Bankruptcy form. Prepare to pay the more than $1,700 required to file. - Submit your reorganization plan.
After filing, a company is extended four months to write a reorganization plan. Your creditors stop all collections in that time. - Await the vote.
Your creditors and the court review your submitted plan and vote on whether to approve it. Negotiations may start up again if creditors aren’t happy with your proposition.If creditors refuse to accept your proposal, your company can request a “cram down” — essentially asking the court to force your creditors to accept the proposal. - Follow through.
Your company begins applying the approved restructure and payment plan. Your plan can take anywhere from six months to two years to complete, depending on how complex your finances.
Should I hire a lawyer?
Due to the scope and potential complexity of filing for Chapter 11, you might benefit from a lawyer who’s an expert at negotiating with creditors. Your lawyer can also ensure that you’ve accurately disclosed your financial details to the court.
Going it alone is a possibility, but it’s likely that your case will end up in a rejected petition without legal counsel.
Do I qualify for Chapter 11 bankruptcy?
The requirements to qualify for Chapter 11 depend on what kind of entity makes the claim:
- Individuals. You must have at least $1,081,400 in secured debts and $360,475 in unsecured debts.
- Small businesses. The debtor must be in an ongoing business, with debts of $2,566 or less.
- Big businesses. No limit on the amount owed.
Types of debt Chapter 11 bankruptcy covers
Common types of unsecured debts covered by Chapter 11 are:
- Past due taxes
- Mortgage
- Motor vehicle contracts
- Credit cards
- General loans
- Lease or executive contract debt
How will Chapter 11 bankruptcy affect my credit?
If you file for Chapter 11 bankruptcy as an individual, your bankruptcy stays on your credit history for 10 years, which can make approval on future loans or credit difficult. However, as soon as the bankruptcy is approved by your creditors, you’re able to start rebuilding your credit score.
As a business owner, Chapter 11 bankruptcy affects your personal credit only if you are the sole proprietor of the company or a half of the partnership and personally liable for the debt.
Alternatives to Chapter 11 bankruptcy
Bankruptcy can be an expensive, lengthy process for businesses and individuals, requiring regular reporting of your finances to your trustee. Before you proceed, consider whether there’s a core part of your business that can succeed without bankruptcy:
- Are your financial troubles due to a one-time event, or is there a steady decline in business that can’t possibly be remedied?
- Are there issues with management that need to be addressed?
- Can restructuring be completed without court authority?
If you’re thinking about filing to remedy your personal finances, try negotiating a more manageable payment plan with your creditors first. Or look into consolidating your debts with a balance transfer card or debt consolidation loan. These products combine your various debts into a single monthly payment, ideally at a lower interest rate.
Finally, consider a debt relief company. These companies can help you create debt management plans and contact your debtors to negotiate lower rates or terms, no gavel required.
Compare debt relief companies
Before you sign up with a debt relief company
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. You might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
- Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
- Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
- Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
Bottom line
Chapter 11 bankruptcy gives companies a chance to get their finances in order, restructuring the company to lay the groundwork for a more successful future.
But it takes time, is expensive and can risk your reputation. Consider a last resort after exploring your options, including a debt-relief service. Learn more and read our bankruptcy guide.
Frequently asked questions
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