Do Chapter 11 Bankruptcies Work
Not usually. Studies vary, but the success rate is probably no higher than 10% to 15%. The low statistics are not surprising considering business are already in deep financial stress and a Chapter 11 is the last-gasp effort to keep operating. The rules are complex and the costs are high compared to other forms of bankruptcy.
You need a lot of determination, a good lawyer and a fair amount of luck.
Even when a Chapter 11 business bankruptcy is completed, it can have lingering effects. It can influence some of the important intangibles in a negative way, such as customer goodwill, brand value, and business relationships.
Of course, the best strategy is to avoid bankruptcy regardless of what Chapter is filed.
How Much Does It Cost To File For Bankruptcy
The American legal system has developed a range of tools to help people overcome unexpected calamities.
This has resulted in several kinds of bankruptcy, each with its own benefits and challenges. For example, most people are familiar with foreclosure. However, this is a measure of last resort, as you could file for Chapter 7 or Chapter 13 bankruptcy instead.
There are many ways to recoup your financial health. You dont need to lose your home and belongings and you certainly dont need to lose your dignity and self-respect. With Roemerman Law, you will have the proper legal advice and all options presented to you to choose the one that best suits your needs.
Before you can decide which kind of bankruptcy is right for you, you should understand what your options are.
How Long Does Chapter 11 Take
Because there is no start-to-finish time limit for the Chapter 11 process, a case can last for years. Compared to other kinds of bankruptcy, Chapter 11 bankruptcies sometimes are prolonged operations, which is why they can be costly.
Its true that many cases are completed, repayment and all, within six months to two years after they are filed, and some wrap up even sooner than that. But the larger and more complex Chapter 11 filings can last for five years or longer, depending on the amount of litigation involved and the terms of the reorganization plan.
For example, if the plan includes an extended payout or the debtor needs to complete a long-term contract in order to manage the repayment, the case will remain open.
The first stage of a Chapter 11 bankruptcy is called pre-confirmation, which is the time leading up to when the bankruptcy court approves the reorganization plan. The person or entity filing the Chapter 11 has four months after the filing date to propose the plan, but that deadline can be and often is extended for up to 18 months.
Since 2019, there has been an exception to that extension rule for small businesses in Chapter 11. Subchapter V of Chapter 11 bankruptcies expedites the process by imposing shorter deadlines and increasing flexibility in negotiating reorganization plans with creditors. It makes bankruptcy easier for small businesses, but small business owners who file under Subchapter V rarely are granted the deadline extension.
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Chapter 11 Proceedings: Pros And Cons
Chapter 11 cases are complex and expensive, which is the most significant disadvantage for small business owners. It’s also why Chapter 11 cases make up only a tiny percentage of bankruptcy cases filed. However, special procedures available to small businesses through Chapter 11, Subchapter V can help lower costs significantly.
Important Chapter 11 advantages include:
- The plan creates new contract terms between the debtor and creditors and can be as long as needed, which is helpful for a small business debtor who needs extended payment terms on real property mortgages or equipment loans.
- If less than the full balance on a particular debt is to be paid in the plan, the debt discharge will occur at plan confirmation rather than after completion of the plan, unless the court approves a plan without creditor consensus in Chapter 11, Subchapter V cases.
- Unlike Chapter 13, Chapter 11 doesn’t require debtors to turn over their disposable income to a trustee. The “debtor in possession” remains in control of the business.
- In Chapter 11, the appointment of a trustee to manage the case is the exception rather than the rule and is usually appointed when gross mismanagement or fraud is suspected.
Also, small business debtors can take advantage of special provisions that help streamline Chapter 11 matters. You’ll qualify as a small business debtor under Chapter 11, Subchapter V if you’re an individual or entity who is:
For more information, see Chapter 11 Bankruptcy: An Overview.
Jump Ahead In Line: Critical Vendor Status
A company often has certain suppliers who are essential to its operations. In the months leading up to a bankruptcy filing, a troubled companys vendors may become aware of the companys distress as traditional payment patterns change. Suspicious suppliers may begin restricting the supplies and services until the company makes catch-up payments. In dire circumstances, key suppliers will even cut off the company completely, exacerbating its distress. In such circumstances, the company may try switching to other vendors who are willing to allow more favorable payment terms. Sometimes, however, there is no substitute. In bankruptcy, an essential supplier with no substitute is known as a critical vendor.
A critical vendor has strong leverage in negotiating recovery of its prepetition claims because it can simply refuse to provide additional supplies and services that the company desperately needs to continue operating. However, there is a high burden of proof: The debtor must have an essential need for the vendor and there cannot be any acceptable substitute suppliers.
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Revocation Of An Order Of Confirmation
On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud. An order under this section revoking an order of confirmation shallâ
contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation and
revoke the discharge of the debtor.
inserted “if and only” after “revoke such order”.
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
Amendment by Pub. L. 98â353 effective with respect to cases filed 90 days after July 10, 1984, see section 552 of Pub. L. 98â353, set out as a note under section 101 of this title .
Special Provisions For Small Business Debtors In Chapter 11 Subchapter V Cases
For the most part, small businesses and major corporations must follow the same rules and requirements when reorganizing under Chapter 11. However, special provisions help small business debtors move through the Chapter 11 process more quickly while reducing legal fees and other restructuring expenses.
A company qualifies as a “small business debtor” by meeting the small business case requirements under Chapter 11, Subchapter V:
- is engaged in business or other commercial activities, and
- owes no more than $3,024,725 as of April 1, 2022, in total claims, excluding obligations owed to insiders such as family members of the business owners .
Benefits and special procedures applying to small business Chapter 11 matters include:
No Creditors’ Committee. Ordinarily, in Chapter 11 cases, a committee is appointed to represent the interests of unsecured creditors. A creditors’ committee can retain attorneys and other professionals at the debtor’s expense, significantly increasing the cost of Chapter 11 reorganization. Small business cases don’t involve creditors’ committees.
Additional Filing and Reporting Duties. Small businesses are subject to some reporting and filing requirements not imposed on other Chapter 11 debtors. A small business debtor, for example, must attach its most recently prepared balance sheet, statement of operations, cash flow statement, and federal tax return to its bankruptcy petition when it files for Chapter 11 relief.
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New Easier And Faster Small Business Bankruptcy Option Explained
Chapter 11 Business Bankruptcy is a legal process by which a business may declare bankruptcy but continue to operate the business under supervision. This process is called “reorganization,” because the bankruptcy process reorganizes the business to be more efficient and to be able to pay the creditors of the business. It’s kind of like getting a “reboot” for your business, to bring new life into it.
Chapter 11 is available to any type of business, including sole proprietorships, Limited Liability Companies , and corporations.
The bankruptcy process for Chapter 11 and other types of bankruptcies are run through a special legal system , called bankruptcy court. It’s under the circuit court system in the U. S. Courts website.
Business Bankruptcy: Leave No Doubt In Your Decision
Earlier, we established that no business owner should file for bankruptcy without an attorney. Without the input of an expert, the decision to file for bankruptcy could seem like a no-brainer. You cant pay your businesss debts therefore, bankruptcy is the only option.
But its not that simple. Countless businesses suffer from this problem, but bankruptcy is not the correct solution for every single one of them. Only a business bankruptcy attorney can confirm if bankruptcy will do more good than bad for your professional future. A bankruptcy could potentially stay on your credit record for upwards of ten years. Therefore, the benefits of filing must be virtually indisputable.
When you decide to file for bankruptcy, you will change the trajectory for the rest of your life. This isnt just another debt strategy. Its a decision of where you want your career to be a decade from now.
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Chapter Eleven Bankruptcy: An Overview
Chapter 11 is the âreorganizationâmodel for bankruptcy. Well-known Americanretailers such as Toys âRâ Us and Kmart, as well as a Major League Baseballfranchise, the Texas Rangers, have filed for it. As a CEO, President DonaldTrump decided that three of his Atlantic City hotel-casinos should file for it.
Introduced in 1978, a Chapter 11 proceedingunder the U.S. Bankruptcy Code allows a company or individual to declarebankruptcy, reduce debt and reorganize without having to shut down andliquidate to satisfy debts. Chapter 11 provides a debtor with breathing room. Highprofile examples of Chapter 11 filers include large companies, includingcorporate giants Macyâs, General Motors, United Airlines and Kodak, but Chapter11 is not only for entities like these. In fact, nearly a third ofChapter 11 filers are individuals.
Now letâs compare Chapter 7 toChapter 11. Chapter 7, the most common form of bankruptcy in the United States,is a liquidation. The bankruptcy court appoints a trustee to sell a debtorâsassets and distribute the proceeds to creditors. Chapter 11 is a reorganizationand a debtor filing for Chapter 11 can protect assets and business operationsfrom disruption due to collection activities such as foreclosures,garnishments, lawsuits, and repossession while still operating business asusual.
Initiation of a Chapter 11Proceeding
After the Filing
Chapter 11 Vs Chapters 7 Or 13
Chapter 7 Vs. Chapter 11
The entity that files under Chapter 11 doesnt have to liquidate its assets and remains in control of its operations. It gives the business time to reorganize and to obtain a discharge of previous obligations. However, Congress does not let a corporation, limited liability company, or any other type of business organization obtain a discharge in Chapter 7. Rather, a business that files Chapter 7 is putting up the white flag of surrender.
Chapter 13 Vs. Chapter 11
Although Chapters 11 and 13 allow dismissing debts, they have different costs, eligibility, and completion times. Any entity can file Chapter 11 with no specific debt limit or required income. Chapter 13 can only be filed by an individual and not a business . Chapter 13 also has predetermined debt limits. Chapter 13 also involves having a trustee appointment that manages the distribution of income and potential liquidation of assets to creditors, where a standard voluntary Chapter 11 starts without a Trustee.
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Chapter 11 Bankruptcy New York
A Chapter 11 bankruptcy reorganization plan gives the filer the chance to restructure and renegotiate the terms of paying back creditors. The difference between Chapter 11 and the other Chapters lies within the debtors obligations and how the filers plan gets confirmed under the Bankruptcy Code.
Chapter 11 is often thought of as corporate bankruptcy. This is because most cases are filed by corporations and large business owners. In rare cases, individuals may be required to file Chapter 11 if they have too much debt and dont qualify under other chapters of bankruptcy.
Chapter 11 may not be the best solution for small business owners. Higher fees are often required and it usually is costlier and more burdensome than other chapters of bankruptcy. Also, individuals have more obligations compared to Chapter 7 or Chapter 13.
An experienced Business Bankruptcy Attorney will help you choose the best Chapter for your filing and maximize the chances of a successful filing.
How To Prepare For A Chapter 11 Bankruptcy
You’ll need to gather and organize all of your business paperwork. This includes documents proving what you owe, how much you owe, and to whom you owe it, as well as any payments you’ve made. Add to that any collection letters or any other documents related to your debts. Essentially, if something is relevant to your Chapter 11 bankruptcy, it’s important that you prove it with written evidence, Moran says.
“Bear in mind that you must provide this information within 15 days of the date of filing, so be ready before you send in the official Chapter 11 bankruptcy filing,” she says. “Your attorney will know these time limits and all the other details, which is why I strongly urge people to talk to a bankruptcy lawyer about their own situation.”
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Chapter 11 Bankruptcy Can Restructure A Distressed Business
Chapter 11 bankruptcy can restructure a distressed business.
Under Chapter 11 bankruptcy, a business may continue operations under court protection while a plan of reorganization is proposed to creditors.
Chapter 11 bankruptcy can also be filed to liquidate the assets of a business, in whole or in part, usually under the control of existing management.
Diverse Types Of Unsecured Creditors
Vendors are only one type of unsecured creditor in the general unsecured class. In a large bankruptcy case, there can be thousands or tens of thousands of other unsecured creditors in the same bucket. Since, in general, all unsecured creditors must receive the same rate of recovery on their prepetition claims, it can be helpful for vendors to monitor developments affecting other unsecured creditors. For example, the trading price of an unsecured bond may indicate the recovery rate for all unsecured creditors, including vendors.
Types of Unsecured Creditors
There are many types of unsecured creditors which may include:
- Utilities that have provided unbilled, prepetition services to the debtor
- Vendors who are awaiting payment after shipping goods or providing services to the debtor in the prepetition period
- Landlords who entered into prepetition leases that have been rejected by the debtor in the postpetition period and have damages resulting from such breach
- Plaintiffs with meritorious litigation claims against the debtor
- Investors who hold bonds, debentures, subordinated notes, and other types of unsecured securities
- Counterparties with swaps, futures, or other trades with the debtor that are unsettled and in-the-money as of the petition date
- Governments due unpaid, prepetition, nonpriority taxes
- Employees who are due unpaid, prepetition wages and benefits
- Retirees due unfunded amounts from pensions
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How Do You File Chapter 7 Bankruptcy
You can probably complete the process within six months. Youll have to follow several steps.
You must complete pre-file bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
Find an attorney:Before diving into the various forms required to file Chapter 7, find a qualified bankruptcy attorney to help. Its hard to find money for a lawyer when you need debt relief, but this is not a DIY situation. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
File paperwork: Your attorney will help with filing your petition and other paperwork. But its on you to gather all relevant documentation of your assets, income and debts. An automatic stay goes into effect at this point, meaning that most creditors cannot sue you, garnish your wages or contact you for payment.
Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee will begin managing the process.
Meeting of creditors: The trustee will arrange a meeting between you, your lawyer and your creditors. Youll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
Your eligibility is determined: After reviewing your paperwork, the trustee will confirm whether youre eligible for Chapter 7.
Education course: Before your case is discharged, youll have to take a financial education course from a qualified nonprofit credit counseling agency.
What Is Business Bankruptcy
The type of bankruptcy that most people think of when they hear this word is Chapter 7. Filing for Chapter 7 bankruptcy usually results in liquidation. Business assets are distributed to creditors, so the business shuts down. This is the most common and least favorable type.
On the other hand, Chapter 11 and Chapter 13 do not share this reputation. These two usually result in the reorganization or consolidation of the businesss debts. Plenty of companies have filed for Chapter 11 or Chapter 13 while maintaining operations and are even alive and kicking today.
The type of bankruptcy you file for depends on your businesss debt and overall financial health.
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Abandonment Of Railroad Line
The court, after notice and a hearing, may authorize the abandonment of all or a portion of a railroad line if such abandonment isâ
in the best interest of the estate or
essential to the formulation of a plan and
consistent with the public interest.
If, except for the pendency of the case under this chapter, such abandonment would require approval by the Board under a law of the United States, the trustee shall initiate an appropriate application for such abandonment with the Board. The court may fix a time within which the Board shall report to the court on such application.
After the court receives the report of the Board, or the expiration of the time fixed under subsection of this section, whichever occurs first, the court may authorize such abandonment, after notice to the Board, the Secretary of Transportation, the trustee, any party in interest that has requested notice, any affected shipper or community, and any other entity prescribed by the court, and a hearing.
Enforcement of an order authorizing such abandonment shall be stayed until the time for taking an appeal has expired, or, if an appeal is timely taken, until such order has become final.
In authorizing any abandonment of a railroad line under this section, the court shall require the rail carrier to provide a fair arrangement at least as protective of the interests of employees as that established under section 11326 of title 49 .
Historical and Revision Notes
senate report no. 95â989