Chapter 11 bankruptcy is a tool for small businesses that are struggling with debt. The process allows you to reorganize your business and pay off debts while keeping some of your assets. This type of bankruptcy gives you a chance to keep your business running while you create and work through a reorganization plan. This allows you to stay in business and become more profitable in the future. In most cases, you have four months to restructure, but you can extend this to up to 18 months if the court approves.
While Chapter 11 is a plan designed for businesses, there are some cases for which you might file as an individual. If you have too much debt to qualify for a Chapter 13 filing, or if you don’t want to liquidate all your assets, you might be able to file a Chapter 11 personal bankruptcy. There are some guidelines for your secured and unsecured debt that you must meet in order to qualify, but if you meet the requirements, filing for Chapter 11 allows you to reduce the interest rates on your debts, and in most cases, you can also extend your repayment terms. This gives you lower monthly payments more time to pay off your debt.
The whole process starts when you meet with a bankruptcy attorney. They can help you go through all of your options and decide if Chapter 11 is the best option or if you should consider another form of bankruptcy or debt relief. Next, you file a formal petition in the state where you do business. In most cases, you are assigned a trustee who will guide you through the whole process.
In some cases, in addition to the restructuring plan:
Creditors have a large role in Chapter 11 reorganization. They can choose to support your petition to reorganize, or they can oppose it. The bankruptcy court takes input from the creditors into consideration along with input from other parties when they make a decision on how you should proceed. The creditors’ committee has the right to come up with a reorganization plan for your company, or they could decide that you should liquidate and file a Chapter 7 bankruptcy plan.
Unsecured creditors often form a committee in order to represent their interests in a Chapter 11 proceeding. This committee can hire an attorney at your expense along with other professionals to help make sure their interests are a part of the plan.
Your reorganization plan puts your creditors into different classes and your plan must explain how you will manage the claims for each.
Any creditor who has impaired claims or creditors with modified contractual rights will vote on the reorganization plan by ballot. At least one class of the impaired creditors need to accept the plan before the court can confirm it. All the creditors whose claims you will pay in full automatically vote yes.
A cramdown is a situation where none of the impaired creditors accept the plan, but the court confirms it anyway. The court will only do this if your plan does not discriminate against any of the classes and if it is fair and equitable to each of the classes.
The reorganization plan is a large piece of Chapter 11. Essentially, the plan is a contract between you as the debtor and your creditors that spells out how you will operate and pay your obligations in the future. In most cases, you have four months to propose a plan, but if you can show good cause, the court may extend the period to up to 18 months after the petition date. This time period is called the “exclusivity period.” The plan must also include a classification of claims and a detailed description of how you will treat each of the classifications.
Throughout the duration of the restructuring process, you need to take steps to become profitable. These steps often include:
When the bankruptcy court approves your plan, it is called confirmation. In order to approve the plan, the court needs to see that it meets several different requirements, including:
Chapter 7 bankruptcy is more common than Chapter 11; it includes liquidating assets in order to pay as much debt as possible. In some cases, a Chapter 7 bankruptcy is a better solution. You can only file for Chapter 7 if you haven’t already received any other bankruptcy discharge in the past six to eight years. The court will also consider whether or not Chapter 13 is a feasible option.
If you do file Chapter 7, most of the creditors will stop trying to collect on their debt as soon as it takes effect. It also means that they are temporarily prevented from collecting wages, bank accounts, or your car or property. Your protected assets under a Chapter 7 filing include your pension, household goods, and jewelry up to a certain value.
The proceeds of all your liquidated property go to your creditors, and you are legally cleared of debt. There are usually no legal fees, just a one-time filing fee. The downside to filing Chapter 7 is the effect it has on your credit. Your credit score will reflect the bankruptcy, and it will be almost impossible to get a loan with a good interest rate for many years.
Chapter 13 Bankruptcy is for individuals only. It is not available for companies, but you can file Chapter 13 for business-related debts. If you have a sole proprietorship, you might benefit from filing Chapter 13 if your personal debts become overwhelming. This bankruptcy filing allows you to pay your discretionary income to creditors over several years, and the amount you pay depends on how much you earn. Most payment plans last from three to five years.
To qualify for Chapter 13, both your secured and unsecured debt cannot exceed certain amounts, and you have to prove that you have a steady income.
While there are many advantages to filing for Chapter 11, it is not for everyone. Even though you get an automatic reprieve from creditors and you can keep your business going, there are some downsides to consider.
The best way to decide whether a Chapter 11 bankruptcy filing is right for your business is to speak with a bankruptcy attorney. They will lay out all your options and provide you with some advice about which direction you should go. Make sure to hire an attorney who has bankruptcy experience. Even though it might be expensive, an attorney is an essential part of the process if you want to keep your business.
No matter what type of bankruptcy you file, it will affect your credit. Both Chapter 11 and Chapter 7 bankruptcies remain on your credit report for 10 years, while a Chapter 13 bankruptcy will last for seven years. Having a bankruptcy on your credit can prevent you from taking out new loans as an individual and it can be challenging to get a credit card. Bankruptcy also makes it very difficult to buy a home or buy a car.
It is important to think several years down the road when considering whether you’re better off filing for bankruptcy or finding a different way to settle your debts. Give Solvable a call and let us help you with your options for bankruptcy.