What Exactly Is A Chapter 11 Bankruptcy And Who Can File Under Chapter 11?
Other than a non-business trust, just about anyone can file Chapter 11. Chapter 11 is an opportunity to reorganize your debts and your financial condition.
Particularly important is the automatic stay. When you file a bankruptcy case, you get an automatic stay. It stops all creditors from being able to enforce their claims against you. They can’t sue you, enforce a judgment, or do anything to pursue that claim. including governmental authorities. The automatic stay is sort of a time out where you figure out what tools within bankruptcy code you can use to reorganize your finances.
You can sell assets, get rid of assets, refinance, take on new debt, sue creditors, subordinate some creditors to others, challenge taxes, and challenge liens. Depending upon the value of the assets, you can pay your unsecured creditors significantly less than they are owed.
The standard for success in a Chapter 11, through a plan of reorganization, is to provide your creditors more than they would receive in a Chapter 7 liquidation. If you do that, odds are you are going to get your plan of reorganization confirmed with all the benefits. If you are a service business, you usually have no assets. A liquidation of your business will result in next to zero dollars. If you are able to remain in business, you will be able to pay your creditors more than they would receive in a Chapter 7.
Outside of bankruptcy, most debt forgiveness is a taxable event. If you get rid of debt, that is a taxable event. I am responsible for those taxes unless I am insolvent, and the debt forgiveness does not render me solvent. If you are solvent and the debt is forgiven, then you are obligated to pay taxes on that. You don’t have to be insolvent to go into bankruptcy.
I frequently refer to bankruptcy as a strategy for success. Your success, as a business, is to remain viable and to keep going. Bankruptcy is what enables you to do it. It is not a sign of failure. It is a sign of hope and resilience.
Why Would I Choose Chapter 11 Over Chapter 7 Or Chapter 13?
We have to give people the information they need to make an informed decision. In 2005, congress required that before individuals file for bankruptcy, they go through a counseling process to make sure that they are doing the right thing. As a consumer, whether you are a corporation or an individual, you need to know why you are doing what you are doing and counseling will really answer your questions.
Chapter 7 was the original form of bankruptcy; it was a liquidation. Basically, all of the assets got liquidated to pay creditors. The debtor got a discharge of their indebtedness. The problem with that is that you’ve lost the ability to reorganize. This may be a temporary situation and the problem may be solvable. Chapter 7 has what is called a Chapter 7 trustee, whose job is to liquidate the assets, martial the assets, and pay those to creditors. A cynical and unspoken rule is that a trustee’s first obligation is to get themselves paid, which means that they are looking for assets. They are going to be looking to sue the principals of the entity and anyone else they may have a claim against for the purpose of getting money.
As an entity, you do not want to file Chapter 7. You can simply close down your business and walk away in an organized manner. If you have a secured creditor, you can do even better. The secured creditor is going to get everything and get paid. There is no requirement on the individual, absent fraud, that the business pay all of its creditors. A Chapter 11 is to reorganize. The purpose is to keep assets that you will otherwise lose. You get to keep assets and use those assets for your benefit in the future.
Chapter 13 is considered the poor man’s Chapter 11. It is an opportunity to save assets, called a Wage Earner Plan. I individuals who have up to a certain amount of debt have the ability to go into bankruptcy and pay their creditors based not on how much they owe, but on what disposable income they have. The payments are over a several year period. You can keep your home and the equity in your home, if you’re able to pay your creditors based upon your disposable income for a period for five years.
When you go into a Chapter 13, you get two weeks to put in a plan and start making payments under that plan. It is hard to believe that a person is going to be able to do in two weeks what they have not been able to figure out for the past two years of debt. Chapter 13, as attractive as it sounds, is not realistic for most people. One of the benefits of Chapter 11 is you can pay people over time but you don’t have to come up with a program within two weeks. There are also various forms of Chapter 11. You have the standard form of Chapter 11, small business cases, and single asset real estate cases.
In a single asset real estate case, a company owns one piece of real estate and they are not able to make payments on it. The mortgagee is losing on it and the debtor wants to preserve that asset, to capitalize on. Lender debtors with single pieces of real estate getting more out of the process than they wanted them to. So, the single asset real estate case was created. It says that single asset real estate debtors must come up with a plan of reorganization or start making payments within 90 days of the case’s filing or the automatic stay will be lifted and the creditor can go forward to foreclose on that property.
Then, there is the small business Chapter 11 case, which is for small businesses. Small businesses were being in bankruptcy for too long. So, they set a limit that for being in Chapter 11. You have to file a plan of reorganization within 300 days and you have to confirm that plan of reorganization within 45 days after you file it. This can be extended if you can convince the court.
In 2019, the Small Business Reorganization Act was created. It is supposed to be a boon for small businesses, making the process simpler. It is available for businesses and individuals who have $2.7 million of debt, as a result of the CARES Act the amount was increased. These cases have certain benefits in conducting a Chapter 11 case. They don’t have to do disclosure statements. Plan confirmation is easier. They can do cram down, which is forcing a plan of reorganization on creditors, as long as they are able to commit disposable income to creditors over a five-year period.
Chapter 11 does benefit creditors because you can’t do business with someone whose doors are closed. Creditors have incentive to take less than 100 cents on the dollar because it is better than nothing.
One of the wonderful things about bankruptcy is that bankruptcy lawyers are quite unique. We are constantly thinking out of the box, which is a fun thing about our craft. Bankruptcy basically turns the rest of the law on its head. You can undo contracts, pay people less than they’re owed, avoid paying taxes and, in some instances not pay taxes. You’re able to remove liens and do all kinds of truly magical things that the regular law does not permit.
For more information on Chapter 11 an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (212) 739-7599 today.