Chapter 11 Bankruptcy

What is Chapter 11 Bankruptcy and How It Works

Are you thinking of filing for Chapter 11 bankruptcy? An attorney can help you navigate the process and present your case in court. We have been connecting Americans with bankruptcy lawyers since 2001.

What Is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is often referred to as reorganization bankruptcy. This is because it involves the reorganization of the assets, debts, and affairs of a person or business. It is a legal plan that involves showing a bankruptcy court a plan to repay the debt you have. Depending on your circumstances, you may only be legally required to pay back a percentage of the debt that you owe.

Both companies and individuals can file for Chapter 11 bankruptcy. At the commercial level, Chapter 11 bankruptcy is a type of reorganization plan that allows large companies to continue to stay active. However, it allows companies to keep working to repay their debts and their creditors.  In fact, the majority of Chapter 11 bankruptcy cases are filed by businesses.

What Are the Differences Between the Two Main Types of Entities That Can File for Bankruptcy?

Individuals or commercial entities may have a tough time keeping up with bills and debt loads. They might find that it’s time for a fresh financial start. Filing for Chapter 11 bankruptcy is one of the many options available. It is important to note what qualifies for this type of bankruptcy. Entities must be able to prove that they can meet the payback requirements.

Commercial Bankruptcy

When companies file for Chapter 11 bankruptcy, they make the news. The bigger the company, the more likely this is. Common examples include GM, American Airlines, and Macy’s. However, unlike other types of bankruptcy, this is not a case of the business shutting its doors and giving up. As mentioned earlier, it merely reorganizes debts so that the company can continue to serve customers while satisfying creditors’ demands.

What is the main difference between commercial and individual bankruptcies? Virtually all companies can file for Chapter 11 bankruptcy, while not all individuals qualify. Here are some examples of companies that can file for Chapter 11 bankruptcy:

  • Franchises
  • Sole proprietorships
  • Pass-through LLCs
  • National corporations

Individual Bankruptcy

Have you have tried to file for Chapter 13 bankruptcy and received advice that your debt load was too high? Then Chapter 11 is open to you. If you have secured debts exceeding $419,275 and unsecured debts higher than $1,257,850, you may qualify. These figures get adjusted every three years to account for economic changes, such as inflation. The most recent adjustment was in February of 2019.

If your debt load is lower than these figures and you realize Chapter 13 is a better option. However, you might nonetheless wonder how people rack up so much debt. Here are some of the many ways this can happen:

  • An individual takes out a loan to invest in a business on their personal credit. They’ve listed themselves as a personal guarantor. Then the business does not do as well as planned.
  • A high-earner loses their income for a long period of time. Then they cannot afford the debts they accrued while employed, such as a million-dollar home.
  • A person purchases commercial real estate property to flip and sell, but it has more problems than they originally realized.

How Chapter 11 Bankruptcy Works

Having a general idea of how bankruptcy works can help you prepare for your case. These are the basics steps your attorney will walk you through:

Filing for Bankruptcy: Filing is a big step and many people find it overwhelming. This is because of the emotional ties to their business, personal assets, and even their ideas of success. Once the documents are filed, it springs things into motion. This includes meeting with creditors and working on a satisfactory repayment plan.

Getting Approval for the Disclosure Statement: The disclosure statement shares information about the entity’s financial position with the necessary parties. Then they can make a decision about the feasibility of the repayment plan. Before the debtor can proceed, it is necessary for the court to approve the disclosure statement.

Voting on the Plan: The next step involves presenting your repayment or reorganization plan to your creditors. In most instances, the judge and each class of impaired creditors must approve the plan to move forward. As the name implies, impaired creditors are the ones that do not receive the full amount owed as per the repayment plan. Typically, most creditors are impaired. Sometimes another process, known as “cramdown,” gets used instead.

Executing the Plan: Once you make it this far, you can start to breathe easier. The permissions have been granted and the creditors have agreed that you can proceed. An agent then gets appointed to ensure you follow through. This agent handles the backend work of ensuring creditors get the new amounts they are owed.

Discharging the Debt: It’s important to stick with the repayment plan. Then you don’t find yourself in deeper financial trouble than when you began. This does not mean you can never make a late payment, but it is better to avoid this at all costs. Keep up with the repayment plan and pay off a large portion of it, you may get your debts discharged. No matter how tough the process gets, keep this end goal in mind.

Work With an Experienced Chapter 11 Bankruptcy Lawyer

Filing for Chapter 11 bankruptcy can provide a person or business with a financial fresh start. However, this type of bankruptcy is one of the most complex types of cases. It can also be the most expensive type of proceeding. Keep in mind that Chapter 11 will still affect the credit score of the entity filing for bankruptcy. Also, you may still be responsible for paying back some of the debt.

Filing for Chapter 11 bankruptcy also requires a detailed exploration of all possible outcomes for a person or business. That’s why hiring a dedicated and experienced bankruptcy lawyer is essential.

Need help finding the right one to help you build your case? Submit a request online or call us today at (866) 345-6784 to get in touch with an experienced lawyer in your area!

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