The intention of a Chapter 11 bankruptcy is for the reorganization of businesses with a debt burden.  This allows the debtor to submit a plan for restructuring, making a profit, seeking new sources of income, while temporarily staying off their creditors.  While there are advantages in this Chapter for those who qualify, it is more time consuming and costlier than a Chapter 7 bankruptcy (also referred to as a liquidation).

The Chapter 11 Process: Filing the Bankruptcy

The debtor may file a “voluntary” petition for the Chapter 11 bankruptcy protection, where as if the creditor filed the petition it is considered an “involuntary” petition.  In either case, once the petition is filed with the U.S. Bankruptcy Court, an automatic “stay” of all collections are put into effect.  This stops all creditors from seeking payment and gives the debtor time to make a plan for reorganization and the ability to negotiate a more viable repayment terms to creditors.

Once the petition is filed, the business can operate without interruption.  Under the supervision of the bankruptcy court, the debtor can turn their focus on working out a repayment plan for its creditors.  Typically, the repayment amount is lower than the original debt totals. Reports are filed by the debtor each month to keep the court aware of its progress.

Reorganization Plan:

The reorganization plan puts creditors into different classes on how their claims are going to be handled. State and Federal tax agencies are considered first priority, and employees owed wages and stockholder interests are each put into their own class. Each and every secured creditor is placed in its own class, whereas unsecured claims are placed together in one class.  The plan itself may modify the amounts and terms for repayment of debts to these creditors and must have court approval. The essential classes of a reorganization plan should include:

  • Priority Unsecured Creditors: This class includes creditors whose debt is not backed by any collateral and considered for repayment first over other non-priority creditors. Debts of child support, spousal support (or other domestic obligations), retribution payments from a DUI accident, and certain income taxes will fall into this class. Filing for bankruptcy will not clear these debts.
  • General Unsecured Creditors: This class of creditors is paid second to Priority Unsecured Creditors and also includes debts not backed by collateral. Included in this class are credit cards, student loans, medical bills, personal loans, and utilities or other bills.
  • Secured Creditors: These creditors issue credit that is backed by collateral; for example, car loans are issued with the vehicle as collateral. If you stop making the payments, the car can be repossessed. Mortgage loans and any other loan where collateral can be (re)collected will fall into this category.
  • Equity Security Holders: Individuals like shareholders, partners, or employees who have investment in the business’s stocks are considered as Equity Security Holders.

Confirmation and Discharge:

If the reorganization plan has been done in good faith, in compliance with the law, and is reasonable, the court will typically confirm it.  Once the plan is confirmed, debt that existed before the confirmation date, and is not directly addressed in the plan, will be discharged. The debtor must operate in compliance with the terms set in the bankruptcy reorganization plan and is required to repay the creditors according to the agreements.

Consumer Chapter 11

This is not very common, however, in some cases when an individual who still has substantial personal potential, but the debt of the individual exceed the limits set forth by a personal Chapter 7 or 13, the individual will file under Chapter 11 bankruptcy.  Consumers who file Chapter 11 typically have the potential in high personal future earnings.  For example, if you were a popular movie star, and the potential for future movies were great, then you could possibly file under Chapter 11 bankruptcy if you found yourself with a heavy debt burden that you could not repay under the present terms.