Chapter 11 of the U.S. Bankruptcy Code is also known as Reorganization Bankruptcy. It is designed for small businesses to large corporations, allowing them to reorganize to keep their business alive while repaying their debts. It is similar to Chapter 13 in that it allows companies and individuals to repay a portion of their debts over time but while Chapter 13 is only available to those with unsecured debts not exceeding $336,900 and secured debts of $1,010,650, Chapter 11 works with larger figures. The end result could be a reduction of debts or a complete discharge of them, depending on the courts view of the financial prospects of the company at the time of filing. So, how does Chapter 11 work? Read on to find out.
Since Chapter 11 is geared towards bankruptcy filings for large companies, there are two possible filings: either voluntary or involuntary, with the latter being initiated by creditors filing on the company’s behalf. The process of claiming bankruptcy under Chapter 11 is rather straightforward and does not alter significantly whether it is voluntary or involuntary.
1. Organize all paperwork – you will need to gather all financial documents to provide to the courts.
2. Complete the necessary forms – companies must complete all of Form 1, including schedules for assets and liabilities, current income and expenses, contracts and leases, and a statement of financial affairs. Large corporations and sometimes even small businesses are also required to provide a Statement of Disclosure with their Plan of Reorganization. This statement lists and explains all the company’s assets, liabilities, and business affairs in order for the court to be able to adequately and realistically evaluate the feasibility of the reorganization and repayment plan. The official forms that are required as part of this process are available at legal stationary stores, or can be downloaded at www.uscourts.gov/bkforms/index.html.
3. Pay the filing fee – The case filing fee is $1,000 plus an additional miscellaneous administrative fee of $39. The court recognizes that this is a hefty price to pay to declare bankruptcy; therefore, with its permission, a maximum of 4 instalments are allowed with the last one being due 30 to a maximum of 180 days from the date of filing.
4. Become ‘Debtor in Possession’ – this title is given to the debtor who keeps control of the assets until the reorganization plan is confirmed, the case is dismissed or converted to Chapter 7, or until a Chapter 11 trustee is appointed.
5. Court approves the plan – once the Statement of Disclosure and the Plans of Reorganization and Repayment have been reviewed, it is up to the Bankruptcy Court to decide if the company or individual should be allowed to proceed with Chapter 11.
6. Creditors vote – creditors gather to vote on the plan by ballot if their claims are “impaired” by the original plan. This means that those who will be paid less than the full value of their claims according to the debtor’s plan have the opportunity to refuse to grant its approval. Note that if the debts are more than the company’s assets, creditors whose debts were cancelled will likely become the owners of the newly reorganized company.
7. Court issues a ‘Cram Down’ – this can occur when the court forces creditors to accept the plan even if they have voted against it. The debtor will be required to appeal to the court and at least one creditor must vote in favour of it.
8. Court conducts a confirmation hearing – it is at this point that the plans for reorganization and repayment are put into action.
9. Repay the debts – The process of paying back creditors will take anywhere from 2 – 5 years, depending on the proposed solution. During this time a trustee is not normally appointed to the case; however, if the debtor’s management is ineffective or untrustworthy, a trustee will be appointed to oversee the reorganization and repayment. The cost for the trustee will be the responsibility of the debtor.
It should be pointed out that while Chapter 11 is designed as a way for companies to pay off their debts and extricate themselves from financial hardship, individuals are also able to file under Chapter 11 if their debts exceed those allowed under Chapter 13. For individuals who do qualify, it is a complex and expensive option but since no Means Test is required, individuals could spend less paying back unsecured debt over a period of time shorter than 5 years. Another advantage for individuals who wish to file under Chapter 11 is that even newer vehicles are valued at their current value, not the original balance as with Chapter 13. Note that if you have filed or dismissed a bankruptcy claim within 180 days, either as an individual or a business, you will not qualify to file under Chapter 11.
Individuals follow the same process for filing under Chapter 11; however, they must submit the following documents to the bankruptcy court at the time of filing:
• A certificate of credit counseling – proving that the individual has undergone counselling either on a one-to-one or group basis, a maximum of 120 days before filing.
• A proposed repayment plan – this must be based on realistic goals and accompanied by all financial documents of income, assets, and expenses.
• A debt management plan – the credit counselling course generally covers this topic and will provide the debtor with one to include in the filing documentation.
• Evidence of payment from employers – for 60 days prior to filing bankruptcy all pay stubs and other sources of income must be accounted for.
• Anticipated change to monthly net income – debtors must disclose any promotions or changes to employment that may occur during the proposed repayment plan.
If you are an individual with an extreme amount of debt or a business owner finding their company in financial trouble, filing for Chapter 11 Bankruptcy could be the best answer. The process is personally tailored to meet the specific needs of the debtor and a suitable plan to reorganize and repay debts is approved by all parties. Since no trustee is normally appointed, the debtor has the freedom and responsibility to continue running their business as they see fit, with the mindset towards increasing income and paying off creditors in a timely and efficient manner. It should be noted that even if some debts are fully discharged at the discretion of the Bankruptcy Court, there are still some that will remain after the process is complete. As with other chapters of the U.S. Bankruptcy Code, alimony, child support, legal fines, certain taxes, etc. are not able to be discharged.
Now that you know the answer to the question, how does Chapter 11 work, it’s time to find out if bankruptcy is right for you by taking our free bankruptcy evaluation.