Chapter 11 Bankruptcy
Chapter 11 permits any person or business eligible for relief under Chapter 7 to be eligible for relief under Chapter 11. Thus, individuals who cannot qualify for Chapter 7 and Chapter 13 due to the Code’s debt or income limitations can file under Chapter 11 to reorganize their debt in 3 to 5 years. Chapter 11 bankruptcy is intended primarily for the reorganization of businesses with heavy debt burdens, most often associated with corporations but available to small businesses as well. Chapter 11 allows the debtor to propose a plan for profitability post-bankruptcy, which may include cutting costs and seeking new sources of revenue or income while keeping creditors from harming you.
Even though a debtor may sell assets, the primary goal of Chapter 11 is to reorganize the debtor’s debt through a reduction in debt and payment plan while allowing the debtor to continue in its pre-bankruptcy financial and business activities. The debtor continues to operate the business or occupation.
Reorganization with Chapter 11
The major aspect of a Chapter 11 case is the plan of reorganization. A plan of reorganization must follow the requirements in Section 1123 of the Code, including a designation of classes of creditors’ claims. See Content of Plan . Among other requirements, the plan must specify whether any classes are “impaired” which means that the creditor will receive less than the amount of its claim or interest, and how claims or interests will be treated. Creditors and interest holders must be allowed to vote on a plan of reorganization before it is confirmed by the bankruptcy court. After the creditor’s vote, the court determines whether to confirm the plan. Once confirmed, the debtor generally emerges from bankruptcy with all its property, unless the plan provides otherwise. See Effects of confirmation . The finality of the confirmation order provides the debtor WITH A FRESH START.
While Chapter 11 has certain advantages for those that qualify, including more time to file a plan and the opportunity to reorganize, it is more time-consuming and costly than other forms of bankruptcy. Frazee Law Group is usually paid during the Chapter 11 process and, therefore, can proceed with a down payment. However, the least amount a debtor can expect to pay an attorney in Chapter 11 is $20,000 to $40,000. Clients have spent the $40,000. With the cramdown described above and debt reduction, they have been hundreds of thousands of dollars ahead when the process is completed.
Chapter 11 bankruptcy protection allows a company to continue operations as it restructures its finances.
R. Frazee
Small Business Reorganization Act Compared to a Regular Chapter 11
Advantages to the SBRA compared to a regular Chapter 11.
The Small Business Reorganization Act (SBRA) gives small businesses a new option to consider when filing for Chapter 11 bankruptcy. The SBRA is modeled after the streamlined procedures in a Chapter 13 case and provides a cheaper alternative to a regular Chapter 11 bankruptcy. In a regular Chapter 11 bankruptcy, small businesses will usually have to deal with an unsecured creditors committee, will have to get a disclosure statement approved, will have to solicit votes from creditors and must abide by the absolute priority rule which generally requires unsecured creditors to be paid in full to confirm a plan over the objection of creditors. None of that is necessary under the SRBA in order to confirm a plan, saving small businesses time and money during the bankruptcy process.
Differences between Chapter 11 and Chapter 11 under the Small Business Reorganization Act
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What is the debt limit?
Chapter 11
No debt limit.
Chapter 11 under the SBRA
Debt limit of $2,725,625 secured and unsecured combined.
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Is a Trustee appointed?
Chapter 11
Only by court order for cause.
Chapter 11 under the SBRA
Trustee appointed in every case.
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Is an unsecured creditors committee appointed?
Chapter 11
Yes, if unsecured creditors choose to participate in one.
Chapter 11 under the SBRA
Only if ordered by the court for cause.
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Who may file a plan?
Chapter 11
The debtor until 120 days after the petition date, then creditors may file a plan.
Chapter 11 under the SBRA
Only the debtor.
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What is the deadline to file the plan?
Chapter 11
Set by the court.
Chapter 11 under the SBRA
Within 90 days of filing the petition unless extended by the court.
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What is the plan length?
Chapter 11
Any length.
Chapter 11 under the SBRA
From 3 to 5 years.
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Is a disclosure statement necessary?
Chapter 11
Yes, unless the court orders otherwise.
Chapter 11 under the SBRA
No, but the information in the disclosure statement must be included in the plan.
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Are creditors entitled to vote on the plan?
Chapter 11
Yes, at least one group of impaired creditors must approve the plan.
Chapter 11 under the SBRA
No, but creditors can still object to the plan.
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Does the absolute priority rule apply?
Chapter 11
Yes, debtors generally would need to either put new money into the plan or pay creditors in full to confirm a plan over the objection of creditors.
Chapter 11 under the SBRA
No, debtors just need pay all disposable income within the plan period.
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Can you modify the rights of a secured creditor with a lien on the principal residence?
Chapter 11
Only if the lien is completely unsecured.
Chapter 11 under the SBRA
Yes, if the “new value” received from the loan was not used primarily to acquire the residence and was used primarily in connection with the small business.
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What is the timing of the discharge?
Chapter 11
At the time of confirmation, unless the debtor is an individual.
Chapter 11 under the SBRA
After completion of plan payments.
Chapter 11 Bankruptcy starts at $2500.
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