What is chapter 11 bankruptcy?
In short:
Chapter 11 bankruptcy is a form of bankruptcy typically used by companies (not normally for individuals) to reorganize their debts, business structure, and other affairs. Commonly this form of bankruptcy is known as a reorganization bankruptcy. When a company pursues chapter 11 bankruptcy their goal is most likely to remain in business during and when they emerge from bankruptcy.
More on Chapter 11
In-depth:
Chapter 11 bankruptcy is one of the more complex forms of bankruptcy and as a result often a long and expensive process. For that reason, most companies use chapter 11 as a last resort option. Typically, this form of bankruptcy is used by companies to reorganize their operations and renegotiate debt obligations with creditors while remaining in operation.
The process can be started either voluntarily where the debtor files the petition or involuntarily where creditors file a petition so long as it meets certain requirements. At this time the court will also want to have the debtor’s schedule of assets and liabilities, the debtor’s income and expenses, a schedule of executory contracts and current leases, and additional information regarding other financial affairs.
Additionally, the debtor will provide a plan of reorganization that will dive deep into the details of different claims creditors have and how they will be paid under the new plan. Creditors will have a say in how this is handled, if they agree or if they do not agree all of which is subject to court approval. Once a plan is agreed upon the court will likely accept the plan and the process will move forward.
Real Examples
Chapter 11 has been used successfully by many large corporations to reorganize their businesses and come out still in business on the other side. Prominent examples include Delta Airlines in 2007 who underwent a 19-month restructuring, General Motors whose 2009 chapter 11 handling was very controversial, and Six Flags in 2009 after taking on billions of dollars in debt more than they could handle.
The advantage chapter 11 gives companies, like the ones we mentioned above, is three parts. First, they usually get to remain in control of their assets by being assigned the identity “debtor in possession” while also being sheltered from creditors seizing assets listed as collateral. Second, this form of bankruptcy is designed to give them the best option to remain in business in some capacity on the other side of bankruptcy. Lastly, it affords these companies the first chance to propose a reorganization plan.
While there are some advantages companies can gain from using chapter 11 to reorganize it is usually in their best interest to avoid using bankruptcy if at all possible. It’s worth noting chapter 11 is not the only type of bankruptcy available. Depending on if the person seeking bankruptcy is an individual or a business, different forms of bankruptcy may be available to them. We have listed the other most common forms of bankruptcy below.
Additional Types of Bankruptcy
Not all bankruptcy is the same and not everyone is eligible for the same type of bankruptcy. Depending on who is seeking bankruptcy and what condition they are in there are different types or chapters of bankruptcy they may file.
Chapter 7 – liquidation
For individuals – They usually have to have few to no assets in addition to a very low monthly income and must pass a “means test”. This type of bankruptcy does not include filing a repayment plan as other forms of bankruptcy would because all of the debtor’s non-exempt assets would be collected and sold to pay the debtor’s creditors. In addition, the debtor filing for chapter 7 would also need to receive credit counseling from an approved credit counseling agency before they can file.
For businesses – This type of bankruptcy provides for the liquidation of assets to settle the debt. Companies filing this type of bankruptcy are not attempting to restructure and remain in business.
Chapter 13 – wage earners plan
For individuals – Another name for this type of bankruptcy is “a wage earners plan”. The advantage of this form is it may allow the debtor to save their property such as their house by allowing for the debtor to submit a repayment plan to make payments to creditors over three to five years. Some debt may not need to be paid in full depending on which of the three types of claims it is. Priority, claims have a special status such as taxes or child support and must be paid in full. Secured, are claims that are backed by the right to the asset such as a house -the creditor must receive at minimum the value of the collateral in this case. Unsecured, are where the creditor has no special rights to collect any property of the debtor -these may not need to be paid in full. If you are using chapter 13 all your disposable income will likely be used to pay your debts during the three-to-five-year period.
For businesses – Businesses do not file chapter 13, instead, they file chapter 11.
Chapter 11 – reorganization
For individuals – not common
For businesses – This goal of this form of bankruptcy is for the business to reorganize its obligations while remaining in business and in control of its operations during bankruptcy. The company will provide a plan for reorganization, creditors whose rights are in subject will then vote on if they agree with the plan or not until an agreement is made. Investors or owners of the business do not have any of their personal property at risk other than their investment in the company unless the company filing for chapter 11 is a sole proprietorship in which case they do.
Debts not Discharged by Bankruptcy
Not all debts can be discharged by bankruptcy. The objective of the government by allowing for bankruptcy in the first place is to allow someone a financial fresh start but not at the entire expense of the creditor. They additionally don’t want to inadvertently provide a path to game the system and allow people to not make good on obligations where the creditor needs the funds or is intentionally being cheated out of the funds.
As such, common debts that cannot be discharged by bankruptcy include tax claims, debts for child support, debts for willful or malicious injuries to persons or property, student loans, debts owed to tax-advantage retirement plans, personal injury debts caused by the debtor operating a motor vehicle while intoxicated, and more.
Additional Resources
Taxes
If you are in a situation where you owe a large amount of back taxes seeking bankruptcy to discharge those taxes is likely not going to rectify the situation. A better alternative is to work with the Internal Revenue Service (IRS) to find a solution to your problem. Two general plans the IRS offers people are an IRS payment plan where you can make installment payments of the taxes you owe or offer in compromise where you settle your taxes for less than you owe.
You can find more information from the IRS themselves with this link: handling taxes
Student loans
While it is generally true that you cannot get student loans discharged in bankruptcy. In some cases, with a very high bar to pass, it may be possible to get student loans to a more manageable state or discharge.
You can find more information on student aid bankruptcy discharge with this link: studentaid.gov
*Speck & Company is not in the business of providing legal or personalized financial advice. The information presented in this article is for informational purposes only and is intended as a high-level overview of the subject. Additionally, information gathered and presented in this article are from sources thought to be reliable, however, Speck & Company does not guarantee accuracy or completeness. If you believe you need to file bankruptcy, please seek guidance from a trusted financial professional and legal counsel.