What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy allows both businesses and individuals to restructure their debts to regain profitability. By reducing secured interests to the fair market value of the property, extending maturity dates, reducing interest rates on loans, rejecting leases and paying unsecured creditors a lesser amount than what is owed, a debtor’s future revenue or income can service the debt and ensure the viability of future operations. A Chapter 11 bankruptcy plan acts as a new, modified contract between the debtor and its creditors and sets forth the future modified payment terms. Much like other chapters, unsecured creditors usually receive a small distribution and the remaining debt is discharged.
What is the Chapter 11 Process?
Individuals and businesses must set forth a plan of reorganization which is reviewed by the Court and then voted on by creditors for approval. Not all creditors need to vote in favor of a plan to get it confirmed but at least one creditor must vote in favor of the reorganization plan. A bankruptcy court can confirm the plan over the objection of creditors so long as certain conditions are met such as the plan being ‘fair and equitable’ to creditors.
For business debtors, the Bankruptcy Code provides that confirmation of a reorganization plan discharges a debtor from pre-confirmation debts. The confirmed plan creates new contractual rights which replace the pre-filing contracts. Individual debtors will receive a discharge upon completion of plan payments.
When is a Chapter 11 Liquidation Appropriate?
Both individuals and businesses can seek to liquidate through Chapter 11 bankruptcy proceedings much like a Chapter 7 bankruptcy proceeding. This scenario is rare but it allows a Chapter 11 debtor to avoid the scrutiny and interference of a Chapter 7 trustee. The debtor can liquidate assets on more favorable terms than would occur in a Chapter 7 proceeding and possibly bring higher value to the estate for creditors. Selling assets at a higher price may lessen deficiency claims against guarantors and insiders.
What are the Advantages of Chapter 11:
- stop a foreclosure sale
- cure missed mortgage payments over the term of the plan
- reduce mortgages to the current fair market value of the property
- avoid junior mortgages on primary residences or rental properties
- reinstate a repossessed vehicle
- reduce the balance on a vehicle loan to the fair market value of the vehicle
- allows longer repayment periods than the five year period permitted in Chapter 13
- secured loans can be restructured including extended repayment terms and modified rates
- cure missed loan or lease payments on a vehicle
- stop wage garnishment
- remove judgment liens
- reject contracts such as long-term commercial leases
Who is a Good Candidate for Chapter 11 Bankruptcy:
You may be a good candidate for Chapter 11 bankruptcy if you want to reorganize debts but are ineligible for Chapter 13 bankruptcy because you exceed the debt limits, if your business entity has the ability to become profitable but needs to shed excess debt, if your rental properties are underwater, if you have a pending foreclosure sale on your residence, if your vehicle was recently repossessed and you want it back, or if you want to repay debts but cannot afford minimum payments.
How We Can Help
It is estimated that only 10-15% of Chapter 11 bankruptcy cases are successfully reorganized. We are able to confirm the vast majority of our Chapter 11 cases. Choosing the right counsel is often the reason for the success or failure of Chapter 11 efforts. Call us today for a free consultation to discuss how a Chapter 11 bankruptcy may benefit you.