What is Chapter 11 Bankruptcy?
A Chapter 11 bankruptcy is for individuals or businesses who intend to reorganize their finances. For some individuals, a Chapter 11 bankruptcy is like a larger and more complex Chapter 13 bankruptcy. Individuals may opt to file a Chapter 11 bankruptcy either because they are ineligible for a Chapter 13 or because they want to take advantage of aspects of Chapter 11 that are not possible in Chapter 13.
Corporations are ineligible to file for Chapter 13 bankruptcy. Hence, if they are attempting to reorganize through a bankruptcy and they are not being liquidated, Chapter 11 is their only option.
Chapter 11 is much more complicated than a Chapter 7 or a Chapter 13 bankruptcy. In order to enter a Chapter 11 bankruptcy, you have to propose a plan to the Court that states how you are going to reorganize your finances. If the Court believes you can make the plan work, and you have proposed the plan in good faith, the plan may be confirmed and your bankruptcy will be mostly complete, if you have enough creditors who vote “yes” to accept the plan.
Consider companies like K-Mart, WorldCom, American Airlines. They have all entered into a Chapter 11 bankruptcy. Contrary to popular belief, individuals can file chapter 11 bankruptcy too and take advantage of many of the same tools that helped a struggling franchise such as the Dodgers reemerge as a stable and profitable entity after completing the bankruptcy process.
Who can file for Chapter 11 bankruptcy?
Individuals or businesses can file for Chapter 11 bankruptcy.
In order to file, you need to have a stable source of regular income. The money does not necessarily have to come from employment. It can be pension plan payments, social security, disability payments, unemployment benefits, child support or maintenance, royalties and rents, gifts of money from friends or family, and proceeds from selling property.
Once you have the money source, you have to have enough to fund the plan, this means you must have disposable income. It is your disposable income which will fund the plan.
You are probably a good candidate for a Chapter 11 Bankruptcy if:
- You are an individual and are ineligible to file for Chapter 13 because your secured debts exceed $1,149,525.00 or your unsecured debts exceed $383,175.00.
- You have investment properties that are worth less than what you owe on them and you intend to keep the properties and rewrite the mortgages.
- You are behind on your mortgage payments or car loan and want to make up the missed payments over time.
- You owe more to your 1st mortgage than your property is worth and you have a 2nd or 3rd mortgage.
- You own a business that generates revenue but you need to break leases or change mortgage or employment terms in order to become profitable again.
- You have taxes which are unpaid and are not dischargeable.
- You really want to pay off your debts, but simply cannot do it without the protection of the Bankruptcy Court.
What are the advantages of a Chapter 11 Bankruptcy?
Chapter 11 is one of the best financial tools available to prevent serious financial trouble before it starts. However, it is typically reserved for businesses or individuals who do not qualify for a chapter 13 bankruptcy. An individual is ineligible to file for Chapter 13 if their secured debts exceed $1,149,525.00 or their unsecured debts exceed $383,175.00 (these limits are subject to annual cost of living increases). With a Chapter 11, it is possible to remove 2nd mortgages, strip away debt that cannot be sustained, adjust interest rates on debt you choose to keep, and payoff other debt entirely. Additionally, you can even rewrite mortgage terms for periods that greatly exceed 5 years on investment properties so that you can pay back the debt over a longer period of time and potentially lower your monthly mortgage payments substantially. This is one of the single biggest advantages in filing a Chapter 11 over a Chapter 13 bankruptcy.
A Chapter 11 bankruptcy lets you rearrange your finances, repay a portion of your debts, and put yourself back on your financial feet. The plan will typically last from three to five years. It does take time, but it can be an extremely successful way to alter your financial course and get back on track.
Just how powerful a tool is Chapter 11 Bankruptcy?
Extremely. You can use it to stop a foreclosure, catch up on late mortgage payments, rewrite mortgage terms, and pay off tax liability without accruing penalties and interest. Even if you pay off all your credit card debt over the 3 to 5 year plan, you will pay no interest during that time, preventing your debt from being a moving target.
The filing of the bankruptcy automatically stops all creditors in their tracks. This is because from the moment you file, the court extends its arms around you and protects you from all your creditors. This protection is called the ‘automatic stay.’ Creditors cannot legally garnish your wages or your bank account. They cannot repossess your car, house, or other property. They cannot cut off your utility service or welfare benefits.
Chapter 11 can be used to buy necessary time. Perhaps you have multiple investment properties that are worth less than what you actually owe. Chapter 11 bankruptcy allows you to pay back only the amount that you actually owe on the properties and you can even stretch out the mortgage payment terms and take advantage of historically low interest rates.
What are the disadvantages of Chapter 11 bankruptcy?
Chapter 11 requires a commitment that is typically between 3 to 5 years. You may have to start paying creditors back relatively quickly after you file your case.
Additionally, Chapter 11 cases require that you produce a significant amount of financial data to the Court each month. It’s a big commitment. It requires steady and stable income. Moreover, they tend to be far more expensive than a Chapter 13 bankruptcy case given the significant amount of attorney time involved in the case. 3 to 5 years may seem like a long time, but do not fret, our Los Angeles bankruptcy lawyers have over a decade of experience and will go over your case carefully to determine if pursuing a Ch. 11 bankruptcy is in your best interest.
The biggest reason Chapter 11 plans fail is because individuals or businesses set forth plans of reorganization that are unrealistic financially. When you have our Los Angeles bankruptcy attorneys represent you, we make every effort to set up a plan that you can actually afford. If a plan is not feasible, we will recommend another course of action prior to the filing.