Chapter eleven is the bankruptcy procedure used when businesses need to restructure high levels of debt. When debtors obtain bankruptcy protection under Chapter eleven they are allowed to retain assets while reorganizing debts, as long as they adhere to the guidelines and remit creditor payments on time.
Chapter eleven can be used by corporations, partnerships, and sole proprietors. When the business operates as its own entity only business assets and debts are reorganized. When the business operates as a sole proprietor, Chapter 11 can encompass business and personal assets and debts.
Partnerships can also encompass partners’ business and personal assets. Oftentimes, filing Chapter 11 can lead partners into personal bankruptcy or force them to liquidate personal assets to repay business debts.
Chapter eleven petitions can be submitted by debtors or the debtor’s creditors. When creditors petition the court it is referred to as ‘involuntary bankruptcy.’ Creditors will sometimes force bankruptcy upon debtors in hope of collecting outstanding debts before debtors file bankruptcy on their own.
As with all bankruptcy chapters, Chapter eleven is governed by new bankruptcy laws known as the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA was enacted by Congress in 2005 to minimize the number of frivolous bankruptcy petitions submitted by debtors who engaged in reckless spending habits.
One of the requirements of BAPCPA is that all petitioners are required to obtain credit counseling through agencies approved by the U.S. Trustee. Debtors must file a certificate of credit counseling through the court before the bankruptcy petition can be approved.
Additionally, debtors must present a payment plan to the court for approval. The bankruptcy court arranges a 341 creditor meeting where debtors can meet with their creditors committee to work out restitution of debts.
Debtors provide a disclosure statement regarding company and personal assets and liabilities. The creditors committee uses information provided in the disclosure statement to determine if debtors qualify for Chapter eleven and if so, the amount of debts to be repaid. The U.S. Trustee supervises distribution of creditor payments until debts are fully paid.
After credit counseling and payment plans are submitted, a bankruptcy judge appoints a debtor in possession. This person acts as a fiduciary and is responsible for filing required accounting reports and tax returns; securing owned property and business assets; hiring professionals to assist with the bankruptcy process; and all other required duties that fall under Section 1107 of the U.S. Bankruptcy Code.
Chapter eleven is one of the most complex bankruptcy chapters. Stern guidelines and adherence to payment plans often cause debtors to fail out of bankruptcy. It is estimated more than 80-percent of Chapter 11 petitioners fail to meet financial obligations and reorganization of debts.
Presently, the cost to file Chapter eleven is $1,000 filing fee and $39 administrative fee. In most cases, debtors are required to pay fees when submitting their petition. However, the court can allow debtors to pay filing fees in installments, with the maximum of four installments allowed.
Debtors should consult with a bankruptcy lawyer to determine if Chapter eleven is best suited for their needs. They should also consider bankruptcy alternatives, such as debt consolidation or debt settlement, which may provide the same results without the harsh financial consequences.
United States Courts – Chapter Eleven Bankruptcy Code