Chapter 11 bankruptcy is a debt reorganization process that is most often used by businesses that want to continue doing business and repay its debts at the same time. In addition, it benefits individuals who don’t qualify for other chapters or need certain protections Chapter 11 offers. Overall, Chapter 11 is more expensive and complex than other types of bankruptcy, but it can offer significant advantages if you qualify.
If you or your business is steeped in debt, it is vital for you to gain an understanding of your bankruptcy options. With qualified guidance, you may be able to use Chapter 11 bankruptcy to reduce dischargeable debt, get creditors and collection agencies off your back, and move forward into the future with a clean slate.
What Is a Chapter 11 Bankruptcy?
Chapter 11 involves a reorganization of debt. As a business owner, you can use this type of bankruptcy to:
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Continue operating your business
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Stop pending lawsuits and collection actions
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Reduce and restructure debt, potentially over the objections of your creditors
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Catch up on rent and other bills
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Avoid liquidating certain assets
Once the filing takes place, creditors can no longer attempt to collect your debt because of the automatic stay. This is an order issued by the bankruptcy court that freezes all collection actions.
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After you file, you will have four months to create a reorganization plan (the “Plan”), which will show how you will continue business operations while meeting your financial obligations. In some cases, large businesses may be allowed up to 18 months to create such a Plan.
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The Plan may include:
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Reducing expenses by downsizing
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Selling certain assets
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Modifying loans or mortgages, such as extending the terms or reducing the interest rate
The Plan will also categorize each of your creditors into a certain class, such as unsecured, secured, and priority. In most cases, creditors are allowed to vote on the Plan for it to be approved by the bankruptcy court.
Advantages of Chapter 11 Bankruptcy
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If you or someone you know is facing financial struggles as a business owner, it is important to know you have options.
Some benefits of Chapter 11 bankruptcy include:
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The business can continue to operate while paying off debts
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Chapter 11 bankruptcy lets debtors partially pay back unsecured debts
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Debtors may be able to temporarily defer making certain rent or installment debts
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Adjustment of interest rates
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Debtors in chapter 11 reorganization may be able to borrow money while in reorganization to finance their reorganization
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The automatic stay judgment gives you freedom from harassing creditors contacting you at home or at your business
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Freedom to restructure secured debts where payments can be lower and spread over a longer period.
Individual Chapter 11 Bankruptcy
Chapter 11 may be beneficial for individuals who do not qualify for Chapter 13 or who do not wish to lose assets through Chapter 7. Unlike Chapter 13, Chapter 11 does not limit the amount of debt you can owe. Some of the people who benefit most from Chapter 11 are celebrities, professional athletes, and real estate investors.
At The Law Office of James J. Rufo, I have devoted nearly a decade to helping people and businesses accomplish these goals in White Plains and surrounding areas. You deserve our level of experience, extensive knowledge of bankruptcy law, and involvement in your case from start to finish.
Frequently Asked Questions
What is the short answer on Chapter 11 bankruptcy?
Chapter 11 is a flexible federal reorganization process that allows a business—and in some cases an individual—to remain in control while restructuring debt under court supervision. It is powerful but more complex, expensive, and administratively demanding than Chapter 7 or Chapter 13.
Who can file Chapter 11?
Only an individual or married couple may be a Chapter 13 debtor, including an individual operating a sole proprietorship. A corporation, LLC, or partnership cannot file Chapter 13 in its own name.
Can a corporation or LLC file Chapter 11 without a lawyer?
A business entity generally must appear in federal court through licensed counsel. Because Chapter 11 also involves immediate reporting, cash-management, creditor, and operational issues, early legal and financial preparation is essential.
What is a debtor in possession?
In most Chapter 11 cases, the existing debtor remains in control of property and operations as a debtor in possession, with many of the powers and duties of a trustee. That status carries fiduciary, reporting, accounting, and court-approval obligations.
Does Chapter 11 stop lawsuits and collection activity?
The automatic stay generally pauses many pre-filing lawsuits, enforcement actions, foreclosures, repossessions, and collection efforts. Creditors may request relief from the stay, and exceptions or prior-case limitations may apply.
Can a business keep operating during Chapter 11?
Often, yes. Continuing ordinary-course operations is a central purpose of Chapter 11, but use of cash collateral, unusual transactions, financing, asset sales, professional retention, and other actions may require creditor consent or court approval.
Is a trustee appointed in every Chapter 11 case?
No. The debtor usually remains in possession, although the U.S. Trustee monitors the case and a case trustee may be appointed for cause. Subchapter V is different because a Subchapter V trustee is appointed in every case.
What are first-day motions?
First-day motions are requests filed at or near the beginning of a Chapter 11 case to stabilize operations, address bank accounts, payroll, utilities, insurance, customer programs, cash collateral, and other immediate needs. The required relief depends on the business.
What is cash collateral?
Cash collateral generally includes cash and cash equivalents in which a creditor has a security interest, such as proceeds, rents, or receivables. A debtor cannot freely use it without consent or court authorization and adequate protection for the secured creditor.
Can a Chapter 11 debtor obtain new financing?
Potentially. Debtor-in-possession financing may be approved when the statutory requirements are met, sometimes with liens or priority protections for the new lender. The terms and impact on existing creditors receive close scrutiny.
What happens to commercial leases and contracts?
Chapter 11 allows the debtor, subject to court approval and statutory deadlines, to assume, assume and assign, or reject many executory contracts and unexpired leases. Assumption generally requires curing defaults and providing adequate assurance of future performance.
What is a Chapter 11 reorganization plan?
The plan is the proposal for treating creditor and equity interests and restructuring the debtor's obligations. It may modify payment terms, classify claims, sell assets, reject contracts, recapitalize the business, or provide another path to emergence.