Chapter 11 Bankruptcy: Businesses, Organizations and High Value Individuals

Filing a Chapter 11 bankruptcy may be the right choice for you or your business.  Doing so could allow you to restructure so that you pay off your creditors in a manner that allows you to continue to run your business and become profitable. The entire process can be complete in a short time or several years, depending on the timeliness of actions and the complexity of particular cases. With the help of a good attorney and good counsel, the process can succeed.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is often referred to as a “reorganization” bankruptcy because the debtor’s business is restructured to help the entity continue as well as pay a dividend to creditors.  Usually the filer is a business or organization, sometimes it is an individual who is unable to qualify for Chapter 13.  These businesses can be sole proprietorships, corporations or partnerships.  Sole proprietorships typically choose Chapter 13 if they qualify.  In corporations and partnerships, there is a distinction between personal and business assets. A corporation’s owner has no personal liability for the corporation’s debt.  The partners in a partnership are separate as well, but in some instances they may have to apply for protection individually. In a sole proprietorship the debtor is linked with the business, so personal assets may be used to pay creditors.

Typically, if an individual files for Chapter 11 bankruptcy, it is because the debt amount is too high. In a Chapter 13 bankruptcy, filers are able to reorganize and make a plan to pay off debts just like in a Chapter 11, but a Chapter 13 filer must be under the debt threshold to qualify.  The current limits are $383,175 for unsecured debt like credit cards or utility payments and $1,149,525 for secured debt, like mortgages. The filer works out a mutually agreed upon plan of repayment with creditors.  When the payments are complete, the business, organization or individual is released from most future liability.

Businesses file Chapter 11 bankruptcy to preserve their business assets while reorganizing their debts so that they can be profitable. These cases typically involve more than one type of debt, including:

Secured Debt– Secured debts have some sort of collateral, like land, structures, vehicles or other equipment.  In many situations, these items are worth less than the filer owes for them and Chapter 11 allows for the possible reduction of debt. The filer may request to have the debt lowered to the actual value of the property.

Unsecured Debt– Unsecured debt includes credit card debt, company short term or signature loans and other debts without collateral.  By filing a Chapter 11 bankruptcy, the debtor can reorganize these debts so that the balances will be lowered as a payment plan will be negotiated.  The terms must be agreed upon by the creditors individually. The judge will make a binding decision if the parties are unable to reach a satisfactory agreement.

Leases or Contracts– Business owners may execute contracts for services, rent or other things for varying lengths of time.  These contracts can become too burdensome for the business owner to uphold and over the course of the contract, the same services may have become available at a much lower cost.  The filer can appeal to the court for a release from the contract to pursue the more economically viable choice.

Taxes– Several types of taxes are incurred by a business, such as payroll, income and property taxes. Chapter 11 bankruptcy allows the filer to set up payment plans for the tax payments wherein the business has become delinquent.

Once the debts have been identified, the filer submits a plan for the repayment of each creditor.  The filer can negotiate until a suitable arrangement has been reached. The filer can request the judge make a binding ruling if parties are unable to come to a mutually satisfactory agreement.

Deciding to declare bankruptcy is stressful and you will want to get good advice.  A bankruptcy attorney can steer you through the steps and decisions that you encounter. If you are considering filing for Chapter 11 bankruptcy and want to make the process as pain-free as possible, consult a bankruptcy attorney in Philadelphia like William D. Schroeder, Jr. beforehand. Having the right guidance as early as possible could help you avoid mistakes that could hurt you during the bankruptcy process. For more information or further questions, contact us at 215-822-2728.