Individuals rarely file Chapter 11 bankruptcy because Chapters 7 and 13 provide far more benefits at a fraction of the cost. Businesses file nearly all Chapter 11 bankruptcies, though there are special cases where a Chapter 11 makes sense for individuals.
What is Chapter 11 bankruptcy and how does differ from other bankruptcies?
Whereas a Chapter 7 discharge frees the debtor from most financial obligations that started prior to the filing date, both Chapter 11 and 13 bankruptcies instead reorganize payments so the debtor can slowly make up deficiencies over time.
The difference between liquidation and reorganization
In a Chapter 7 personal bankruptcy, the theoretical assets of the debtor are sold and used to pay creditors. Once the case concludes, the debtor is free of most debts, except for taxes, child support and a few other “priority” debts. Certain assets are exempt from seizure in liquidation bankruptcy, such as qualified retirement accounts, personal property below a certain value and a limited amount of home equity. Chapter 7 petitioners rarely have property that qualifies for seizure and sale, so creditors most often receive nothing.
Chapters 11 and 13 reorganize debt rather than erase it. The petitioner submits a repayment plan to the court. If approved, the plan requires the debtor repay the debts over a long timeframe, which makes repayment fit into the debtor’s budget. Some debts are eligible for reduced interest rates and cram downs. A cram down reduces the amount owed on secured property to its fair market value.
Why choose reorganization?
Individuals who have something to lose in Chapter 7 bankruptcy often choose Chapter 13. Businesses with management that feels they can survive if debt payments are reduced file Chapter 11. Sometimes, individual debtors file for reorganization bankruptcy because they are disqualified from a Chapter 7.
What happens in a Chapter 11 business bankruptcy?
Chapter 11 business bankruptcies are complex, long lasting and expensive. Many ultimately fail, and the business is forced into Chapter 7 liquidation. In a liquidation bankruptcy, the business’s assets are sold and used to pay creditors, forcing the business to close its doors.
Often, businesses suffer a major blow, such as the cancellation of several big contracts during a recession, that makes it impossible to service their debt. If management believes the situation will improve when the economy gets better, a company will most likely file a Chapter 11 to protect its assets from creditors. Without bankruptcy protection, creditors could seize property that the company needs to operate, putting it out of business.
Once the lawyers file the case, the company can create a reorganization plan that allows it to maintain cash flow and survive until conditions improve. Creditors often object to the proposed plan. Unlike most individuals who file bankruptcy, companies often have extremely valuable assets that creditors want to seize. The creditors may also disagree with management’s assessment that the company can survive in the long term and prefer liquidation, so they can get as much money back as soon as possible.
If creditors dispute the plan, the company’s lawyers can ask the court to accept it anyway. If the judge agrees with the company’s lawyers, a court order imposes the plan on the creditors. Large business bankruptcies often involve extensive negotiation and protracted litigation.
Why would an individual file a Chapter 11?
Individuals file Chapter 11 when they want a reorganization bankruptcy but do not qualify for a Chapter 13. People who owe more than the Chapter 13 debt limit have no choice except a Chapter 11. Those who owe large amounts of non-dischargeable debts, such as back taxes, also must file Chapter 11 because a Chapter 13 disallows reorganization of non-dischargeable debts.
Chapter 11 offers the unique advantage of no time limit. Chapter 13 bankruptcies require the debts be repaid within 60 months. A Chapter 11 can extend as long as the court allows.
Many businesses file Chapter 11 bankruptcy and ultimately survive. The few individuals, usually very wealthy, who file Chapter 11 can take advantage of its unique features that allow more time, more cram downs and non-dischargeable priority debts. Chapter 11 bankruptcy comes with many complications; however, considering the complications that make a Chapter 11 necessary, the benefits are well worth the headaches and costs.
If you have any questions about bankruptcy, the attorneys at Border Law can help. We are an experienced full-service bankruptcy law firm that specializes in Chapter 7, Chapter 11, and Chapter 13 as well as any consumer debt, real estate or landlord-tenant matters. We understand the needs for professionalism, privacy and confidentiality in our relationship with our clients. Our Bankruptcy Protection Law Firm will work with you to resolve your debt concerns, effectively and efficiently. Call today for a Free Case Evaluation!