Business Bankruptcy Chapter 11
Also known as a reorganization bankruptcy, a business bankruptcy Chapter 11 is a type of bankruptcy that includes the reorganization of the assets, debts, and business affairs of a debtor.
Named after United States bankruptcy code 11, corporations and other businesses typically file Chapter 11 if they need time to restructure their debts. This form of bankruptcy offers the debtor a fresh start, but the terms depend on the debtor’s fulfillment of the responsibilities of the bankruptcy under the reorganization plan.
How business bankruptcy Chapter 11 works
Business bankruptcy Chapter 11 is considered the most complicated bankruptcy case, and it’s also typically the most pricey type of bankruptcy proceeding. So it’s important that you carefully analyze and explore all of your other options first if you are considering a Chapter 11 business bankruptcy.
During a Chapter 11 business bankruptcy proceeding, the bankruptcy court will help the business restructure their obligations and debts. The business usually stays open and operational in most cases with a Chapter 11 business bankruptcy, which makes it much different than a Chapter 7 corporate bankruptcy. LLCs, partnerships, and corporations typically file for a Chapter 11 business bankruptcy rather than other kinds of bankruptcy.
A company in the process of filing a Chapter 7 business bankruptcy is allowed to continue to operate. The debtor, also known as the debtor in possession, runs the company in most cases, but in cases of gross incompetence, dishonesty, or fraud, a bankruptcy trustee runs the business throughout the course of the bankruptcy case.
The company is not allowed to make many decisions without the permission of the bankruptcy court, including the sale of business assets, expanding or stopping business operations, and beginning or ending a rental agreement. The bankruptcy court also has control over decisions around entering contracts with unions and vendors and paying attorneys. The debtor is not allowed to arrange a business loan that will start after the end of the bankruptcy case.
With a Chapter 11 personal bankruptcy, the business filing bankruptcy has the first opportunity to create and propose a reorganization plan. This plan could include renegotiating your business debts, downsizing business operations to decrease your expenses, and liquidating all of your business assets in order to pay back your creditors. The bankruptcy court will most likely accept your plan, as long as it is considered fair and feasible, and the process can then move forward.
The Small Business Reorganization Act of 2019 went into effect on February 19, 2020 and added a new subchapter V to the Chapter 11 business bankruptcy to make bankruptcy simpler for small businesses. According to the United States Department of Justice, small businesses include any entities with less than about $2.7 million in debts, as long as they meet other criteria.
The reorganization act imposes shorter deadlines for the bankruptcy case, enables more flexibility in negotiating restructuring plans with collectors and creditors, and offers a private trustee to work with the debtor and creditors to develop a consensual reorganization plan.
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law on March 27, 2020 by the president. The act increased the Chapter 11 subchapter V debt maximum or limit to $7.5 million. The act applies to any Chapter 11 bankruptcies filed after the act was enacted and any sunsets one year after the act was enacted.
Frequently asked questions about Chapter 11 business bankruptcy
Here are the most frequently asked questions and answers about Chapter 11 business bankruptcy:
What are the chapters of the United States bankruptcy code?
There are six main chapters in the United States bankruptcy code, and each of these chapters goes over different parts of the bankruptcy process. Chapter 7 is known as a liquidation bankruptcy, while Chapter 9 is for municipalities and Chapter 11 is all about reorganization for businesses or individuals.
Chapter 12 is about family farmers, while Chapter 13 is all about repayment options and Chapter 15 is about international bankruptcies. Chapter 7, Chapter 11, and Chapter 13 are the most popular bankruptcy options.
What is the difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy?
Also known as a liquidation bankruptcy, Chapter 7 bankruptcy is a kind of bankruptcy that can clear away several different kinds of unsecured debts. Filing a Chapter 7 business bankruptcy can be your last resort to help you settle your business finances before closing your business.
A Chapter 11 bankruptcy, on the other hand, is a reorganization bankruptcy and involves reorganizing your assets, debts, and business affairs. The main difference between these two types of bankruptcies is that the business is not required to liquidate their assets with Chapter 11 and they remain in control of their operations.
Are there any benefits to filing a Chapter 11 bankruptcy?
One of the biggest benefits of filing a Chapter 11 business bankruptcy is that the business entity can remain in control of their operations while developing their reorganization plan and going through the process of reorganizing. This allows businesses to generate cash flow that can help with the process of repayment.
The bankruptcy court will also issue an order to help keep creditors from going after the business during the reorganization process. Most creditors tend to be very receptive to Chapter 11 bankruptcies, since these bankruptcies can help them recoup most if not all of their money during the process of reorganization and repayment.
What are the top drawbacks of filing a Chapter 11 bankruptcy?
Chapter 11 business bankruptcy is the most complicated of all of the various types of bankruptcy, and it can be very expensive as well, especially for bankruptcy court proceedings. If you are struggling to the point where you need to file for bankruptcy, the legal costs alone of a Chapter 11 business bankruptcy might be too much for you to manage.
Also, the reorganization plan and process needs to be approved by the bankruptcy court, and the plan needs to be manageable enough, so that you can reasonably pay back all of your debt over the time allotted. That’s why you should make sure to carefully explore and analyze all of your other options before deciding to go with a Chapter 11 reorganization bankruptcy.
We recommend speaking to a Chapter 11 bankruptcy attorney like the Van Horn Law Group to learn more about filing a business bankruptcy Chapter 11.
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