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If your business is struggling under the burden of overwhelming debt, bankruptcy may help. Chapter 11 bankruptcy allows businesses, as well as some individuals, to restructure debts and obligations without shutting down operations. You will likely want an attorney to file Chapter 11 bankruptcy proceedings for you, but this type of bankruptcy requires you to be actively involved in the debt negotiation and repayment process.
Read on to learn more about Chapter 11 bankruptcy, how to file for it and alternatives you might want to consider.
What is Chapter 11 bankruptcy?
Chapter 11 bankruptcy is also known as a reorganization bankruptcy. It’s typically used by businesses, but it can also be an option for self-employed people or high-net-worth individuals. Chapter 11 allows a business owner to restructure their finances and modify existing payment plans. Rather than selling off most assets, as happens in a Chapter 7 bankruptcy, Chapter 11 bankruptcy allows the business to remain in operation.
Chapter 11 is the most expensive way to file bankruptcy, so it’s usually only used for businesses and individuals who do not qualify for Chapter 7 or Chapter 13, either because they have too much income or too much debt. In 2018, there were just 7,095 Chapter 11 bankruptcy filings in the U.S., compared to 475,575 Chapter 7 filings and 290,146 Chapter 13 filings.
Filing for Chapter 11 bankruptcy
Here’s an overview of how to file for Chapter 11 bankruptcy.
File a petition
You must also file with the court:
- A schedule of assets and liabilities
- A schedule of current income and expenditures
- A schedule of executory contracts and unexpired leases
- A statement of financial affairs
These forms are available online from the U.S. Courts.
Individuals filing Chapter 11 must also provide:
- A certificate of credit counseling from an approved agency. You can search for an approved agency through the U.S. Department of Justice.
- A copy of any debt repayment plan developed through credit counseling
- Pay stubs for wages received 60 days before filing
- A statement of monthly income and anticipated increases in income or expenses after filing
- Statements from any federal or state qualified education or tuition accounts, such as 529 plans
Once you’ve filed your petition, you receive an automatic stay. That means your creditors must suspend all judgments, collection activities, foreclosures and repossessions against you. This stay provides time to negotiate with creditors and draft your reorganization plan.
All Chapter 11 filers must pay a $1,167 case filing fee and a $550 miscellaneous administrative fee. Individuals can apply to pay these fees in installments using Form B 103A. If you make payments, you must pay the total in four or fewer installments within 120 days of filing your petition. In some cases, the court may grant an extension up to 180 days. In any case, it is crucial to pay the fees within the time allotted. Otherwise, the court may dismiss your case.
Become a debtor in possession
In Chapter 7 and Chapter 13 bankruptcy cases, the court appoints a trustee to administer the case, liquidate assets and pay creditors. In a Chapter 11 case, this role is typically handled by the debtor, now known as the debtor in possession. As the debtor in possession, you are responsible for controlling assets, operating the business and performing other duties until the court confirms your plan of reorganization. The debtor in possession works with a U.S. trustee. U.S. trustees are a part of the Department of Justice and work to ensure the bankruptcy process is efficient and honest. They oversee your operation of the business, filing the proper paperwork, paying fees and complying with other requirements. The U.S. trustee may also appoint a creditor committee consisting of unsecured creditors with the seven largest claims against you. The creditor committee gives advice on administering the case, overseeing business operations and formulating a plan for reorganization. By law, you must pay the U.S. trustee a quarterly fee until your case is completed. The quarterly fee ranges from $325 to $30,000, depending on the amount you pay to creditors quarterly. If you don’t pay the fee, your case may be dismissed or converted to another chapter of the bankruptcy code.
Plan of reorganization
Within 120 days of filing your bankruptcy petition, you should submit your plan of reorganization, although the court can grant an extension for up to 18 months after your petition date. The plan explains how each class of creditor will be treated.
Creditors who will receive less than the full amount owed to them may vote to approve or deny the plan. After the votes are collected, the court conducts a confirmation hearing to determine whether to confirm your plan.
If the court confirms your plan, you will be required to make payments as required by the plan and any remaining eligible debts will be discharged.
Rebuilding your credit after filing for bankruptcy
Filing for Chapter 11 bankruptcy should not affect the personal credit of LLC members or corporate shareholders unless the member or shareholder signed a personal guarantee for the business’ debts. However, individuals, sole proprietors and partners in partnership who file Chapter 11 will see an impact on their personal credit score.
A Chapter 11 bankruptcy remains on your credit report for up to 10 years. However, the impact of that negative item decreases as time passes, so you should start working to rebuild your credit much sooner.
- Pay bills on time. Payment history is a significant factor in the calculation of your credit score, so make sure you pay your bills on time. This includes your mortgage, credit cards and auto loans, as well as items that typically aren’t reported to credit rating agencies, such as utilities and rent. Those accounts can negatively impact your credit score if they are sent to collections.
- Open a new credit account. Using credit responsibly is a good way to build your score. Open a new credit account, such as a business credit card, as soon as possible. Keep your utilization low and pay the bill in full every month.
- Monitor your credit. At least once per year, order a free copy of your credit report from each of the three credit reporting agencies via annualcreditreport.com. Review each one for errors. If you notice any inaccuracies, follow the credit agency’s instructions for disputing the error.
Alternatives to Chapter 11 bankruptcy
Chapter 11 bankruptcy can be expensive and have a long-lasting impact on your credit. Before going that route, consider the following alternatives.
A reputable credit counseling agency can provide advice on managing money and budgeting and help you develop a personalized plan to get out of debt. The debt relief industry is rife with scammers, so the FTC recommends looking for a reputable credit counseling organization through a local university, military base, credit union, housing authority or branch of the U.S. Cooperative Extension Service.
Debt settlement services negotiate with creditors on your behalf to settle your balance for less than the full balance owed. While that may sound like a great option, these services often come with hefty upfront fees and may not be effective. Even if they can settle your debts, debt settlement negatively impacts your credit score and remains on your credit report for seven years.
If you own valuable property, such as real estate, vehicles, business equipment or other assets, you may want to consider selling them to pay down your debt rather than going through bankruptcy. However, talk to an experienced bankruptcy attorney before you go this route.
If later you end up declaring bankruptcy, a trustee can review any transfers or sales of property made before you filed for bankruptcy. If the trustee determines you sold the property for less than its fair market value, they may cancel the transaction and force the buyer to return the property.
The bottom line
Chapter 11 bankruptcies can be very complex. If you are considering filing, discuss your options with an experienced bankruptcy attorney as soon as possible. Involving an attorney will add to the cost of filing, but their expertise may be worth it when you are navigating complicated paperwork requirements and dealing with sophisticated creditors.