Chapter 11 Bankruptcy: How Corporations and the Wealthy Get Relief

Chapter 11 bankruptcy isn’t just for ordinary people. Corporations and wealthy individuals use it to reorganize debts or liquidate assets.

You’ve probably heard of famous Chapter 11 cases. General Motors and Skymall both filed to restructure their businesses and eliminate overwhelming debt.

Chapter 11 works differently than Chapter 7 or Chapter 13. It offers more flexibility but comes with higher costs and complexity.

What Makes Chapter 11 Different

Chapter 11 focuses on reorganization rather than liquidation. Businesses continue operating while restructuring their debt obligations.

You keep control of your assets as a “debtor in possession.” Your creditors can’t seize property or collect debts during the process.

The bankruptcy court must approve your reorganization plan. Creditors vote on whether to accept your proposed terms.

Who Uses Chapter 11

Large corporations file Chapter 11 when debt becomes unmanageable. Airlines, retailers, and manufacturers frequently use this option.

Wealthy individuals sometimes choose Chapter 11 over Chapter 13. Chapter 13 has debt limits that high-net-worth people exceed.

Small businesses can also file Chapter 11. Recent changes created a simplified process for smaller companies.

How Chapter 11 Bankruptcy Works

You file a petition with the bankruptcy court. Your filing triggers an automatic stay that stops collection actions.

You submit financial statements and a reorganization plan. The plan explains how you’ll pay creditors over time.

Creditors receive your plan and vote on acceptance. The court holds a confirmation hearing to approve or reject it.

The Reorganization Plan

Your plan divides creditors into classes based on claim types. Secured creditors, unsecured creditors, and equity holders each form separate classes.

Each class votes on the plan. You need approval from at least one impaired class.

The court can approve your plan even without full creditor support. Courts use “cramdown” provisions to force acceptance when plans are fair.

Operating During Bankruptcy

You continue normal business operations throughout the process. Courts allow you to pay employees, vendors, and essential expenses.

You need court approval for major decisions. Selling assets, taking loans, or changing business operations require permission.

The U.S. Trustee monitors your case. You file monthly operating reports showing income and expenses.

Chapter 11 vs Other Bankruptcy Types

Chapter 7 liquidates assets to pay creditors. Chapter 11 keeps your business running while restructuring debt.

Chapter 13 works for individuals with regular income. Debt limits exclude wealthy individuals and most businesses.

Chapter 11 costs significantly more than other options. Filing fees, attorney fees, and administrative costs add up quickly.

Cost Considerations

Filing fees for Chapter 11 exceed $1,700. Chapter 7 and Chapter 13 cost several hundred dollars less.

Attorney fees range from $10,000 to over $100,000. Complex cases with multiple creditors cost more.

You pay ongoing administrative expenses during bankruptcy. Accounting, legal, and court costs continue until case completion.

Advantages of Chapter 11

You keep operating your business throughout the process. Revenue continues while you restructure problematic debts.

No debt limits restrict who can file. Chapter 13 caps unsecured debt at $465,275 and secured debt at $1,395,875.

You maintain control as debtor in possession. Chapter 7 assigns a trustee to liquidate assets.

Flexibility in Restructuring

You propose payment terms that fit your situation. Plans can extend up to five years or longer.

Courts allow you to reject burdensome contracts. Unfavorable leases and agreements can be terminated.

You can reduce secured debt to asset value. Cramdown provisions let you adjust oversecured claims.

Disadvantages of Chapter 11

High costs make Chapter 11 impractical for many debtors. Small businesses often can’t afford the process.

The process takes longer than other bankruptcy types. Cases typically last 12-24 months or more.

Complex procedures require experienced legal help. You can’t navigate Chapter 11 effectively without an attorney.

Public Disclosure Requirements

Your financial information becomes public record. Anyone can access your bankruptcy filings and financial statements.

Business relationships may suffer from bankruptcy stigma. Customers, suppliers, and partners might lose confidence.

Credit damage lasts for years after discharge. Chapter 11 remains on credit reports for seven years.

Subchapter V for Small Businesses

The Small Business Reorganization Act created Subchapter V in 2019. It simplifies Chapter 11 for smaller companies.

Businesses with under $7.5 million in debt qualify. The threshold temporarily increased during the COVID-19 pandemic.

Subchapter V reduces costs and timeline significantly. Cases move faster with streamlined procedures.

Key Subchapter V Benefits

No creditor committees form in Subchapter V cases. Committees add expense and complexity to traditional Chapter 11.

You don’t need creditor approval for your plan. Only the court must confirm your reorganization proposal.

A trustee monitors your case but doesn’t take control. You retain possession of assets and business operations.

Alternatives to Chapter 11 Bankruptcy

Out-of-court workouts allow negotiation with creditors directly. You avoid bankruptcy costs and public disclosure.

Assignment for benefit of creditors transfers assets to a third party. The assignee liquidates assets and pays creditors.

If you’re an individual, consider Chapter 7 or Chapter 13 first. These options cost less and conclude faster than Chapter 11.

Businesses might explore private equity investment or asset sales. Raising capital or selling divisions can avoid bankruptcy entirely.

Need help determining the right bankruptcy option? Speak with a bankruptcy attorney for free to discuss your specific situation.

Filing Chapter 11: What You Need

Gather complete financial records before filing. You need tax returns, profit and loss statements, and balance sheets.

List all creditors with amounts owed and contact information. Separate secured and unsecured debts clearly.

Hire an experienced bankruptcy attorney immediately. Chapter 11 complexity makes professional representation essential.

Required Documents

Your bankruptcy petition includes multiple schedules and forms. You list assets, liabilities, income, and expenses in detail.

Submit a statement of financial affairs answering bankruptcy questions. Courts need information about recent transfers and business operations.

File a disclosure statement explaining your reorganization plan. The document helps creditors understand and evaluate your proposal.

What Happens After Filing

The automatic stay takes effect immediately upon filing. Creditors must stop all collection activities and lawsuits.

Courts schedule a meeting of creditors within 40 days. The trustee and creditors question you about finances and plans.

You have 120 days to file your reorganization plan exclusively. After that, creditors can propose competing plans.

Confirmation Hearing

Courts hold a confirmation hearing to review your plan. Creditors can object if they believe the plan is unfair.

The judge evaluates whether your plan meets legal requirements. Plans must be feasible, fair, and proposed in good faith.

Confirmed plans bind all parties to the agreement. You make payments according to the approved schedule.

Life After Chapter 11

You emerge from bankruptcy with reduced debt obligations. Discharged debts no longer require payment.

Your reorganization plan continues for years after confirmation. You must make all scheduled payments to creditors.

Credit rebuilding starts immediately after discharge. Responsible financial management gradually improves your credit score.

Business operations continue under your restructured debt load. Many companies thrive after successful Chapter 11 reorganization.