What is Chapter 11 Bankruptcy?
Chapter 11 is also a “reorganization” bankruptcy, available to business or consumer debtors. There are no income or debt barriers to Chapter 11, but it is generally more expensive and difficult to complete than Chapters 13 or 7. When you hear in the news that an airline or automobile manufacturer has filed bankruptcy, it is usually under Chapter 11. Chapter 11 bankruptcy can be a very complex process. The debtor is required to provide a monthly accounting of all income and expenses, and is subject to the supervision of the United States Trustee. The Chapter 11 debtor must obtain permission from the Bankruptcy Court to pay the business owners’ salaries (in the case of a business bankruptcy), to pay any wages owed at the time of filing, or to hire professionals (including the attorney who files the Chapter 11 Bankruptcy Petition, and the accountant who prepares their tax returns).
Like in Chapter 13, you must create a plan in Chapter 11. However, in Chapter 13 your plan must simply comply with legal requirements, and then if it is confirmed by the Court, when your payments are complete, your dischargeable debts are discharged. In Chapter 11 you must send copies of your plan and a disclosure statement clarifying the details and effects of your plan on all of your creditors, with ballots. Your creditors are then permitted to vote on your plan. Unless sufficient creditors vote to confirm your plan, the Court will not confirm it. There are exceptions allowing a plan to be confirmed over the objections of all creditors, but generally the debtor will not be allowed to keep any property under those exceptions unless all creditors are repaid 100% of their debts with interest, under the “absolute priority rule.” In the case of General Motors, owners of the pre-bankruptcy GM stock were left with worthless stock, and stock in the new General Motors Company was made available through and Initial Public Offering in November of 2010.
Chapter 11 is difficult, and very few Chapter 11 Bankruptcies result in a confirmed plan, with even fewer succeeding. A business considering Chapter 11 must consider feasibility. Bankruptcy reorganizes debts, and if debt service is keeping you from succeeding, reorganization may work. If your business does not generate enough income to cover its ongoing expenses (like utilities, necessary rent, and payroll), it is unlikely that reorganization will help. Michael Faro and J. Christopher Crowder have both successfully obtained confirmation of reorganization plans in Chapter 11 Bankruptcies. If your business, homeowners’, or condominium association is struggling to keep up with debt payments, schedule an appointment to talk about creating a plan to get back on track.