Advantages and Disadvantages of Chapter 11 Bankruptcy
Businesses or individuals facing financial challenges because of debts may file for bankruptcy protection to manage them.
Chapter 11 bankruptcy, also known as “reorganization bankruptcy”, allows business organizations to continue their activities and maintain possession of their assets. As this bankruptcy type permits continuous business operations under court supervision, debtors have a way of paying off necessary dues to creditors.
What is Distinct About Chapter 11 Bankruptcy Protection?
Chapter 11 differs from other bankruptcy types as this permits the debtor to propose a plan that will allow control of the business while paying off creditors. This plan is called the reorganization plan.
The plan can be filed up to 120 days after filing for Chapter 11 bankruptcy. However, courts can grant the ability to delay filing the plan for up to 18 months. Acceptance of the plan may occur within 180 days after filing of the petition. If the debtor fails to file and secure acceptance of a plan, the creditors can file a plan on his behalf.
Who Can File for Chapter 11 Bankruptcy?
Chapter 11 is considered to be more flexible compared with Chapter 7 and Chapter 13. Chapter 11 is very flexible as it can assist:
- joint ventures;
- limited liability companies; and/or
Its flexibility lies in the eligibility prerequisites since there are no income or debt requirements or limitations to qualify for it.
What Does it Take to be Eligible for Chapter 11?
Take a look at the requirements that a debtor must file to qualify for Chapter 11 bankruptcy protection:
- schedule of assets and liabilities;
- current income and expenses;
- schedule of contracts and leases; and
- statement of financial affairs.
An individual who attempts to file under Chapter 11 protection must have received credit counseling from an approved agency during the preceding 180 days.
An individual cannot file for Chapter 11 bankruptcy protection under the following conditions:
- failure to appear in court;
- failure to comply with court orders; and/or
- had prior bankruptcy filing dismissed during the preceding 180 days.
What are the Advantages of Chapter 11 in Nevada?
Let us consider how Chapter 11 can be helpful to businesses and individuals alike. A company or individual that files for Chapter 11 bankruptcy becomes the “debtor in possession”. The debtor in possession has the responsibility to:
- continue to run the business in the most economical way;
- file financial reports;
- maintain accurate accounting of income and expenses;
- maintain assets; and
- perform other duties.
In most cases, the debtor in possession has the control of the business’ operation but in some instances a trustee may be appointed to run it.
For businesses, Chapter 11 is beneficial for the following reasons:
- option to assume or reject executory contracts and unexpired leases to help cut on costs
and help regain profit if company is stuck into bad contracts or leases;
- prevention of collection activity, judgments, repossession and foreclosure from creditors
(invokes automatic stay); and
- relief from creditors that imposes an automatic stay while the company comes up with a
feasible reorganization and repayment plan to creditors.
For individuals, Chapter 11 is advantageous over other bankruptcy chapters, Chapter 7 and Chapter 13. Individual Chapter 11 bankruptcy allows:
- an individual to keep assets (unlike in Chapter7);
- repayment to creditors over time (unlike in Chapter 7);
- restructuring loans on rental properties (reducing the capital down to market value,
lowering monthly mortgage payments, thus, turning those rental properties into income-
producing assets); and
- no debt limits (unlike Chapter 13).
What are the Disadvantages of Chapter 11?
Chapter 11 may have a number of benefits, but it is not exempted from a few drawbacks:
- it is a long process, thus, it is costly (filing, administrative and legal fees) and could be
hard for already in debt businesses to manage their finances;
- rejection by the court of a proposed debt reorganization plan if deemed not feasible,
realistic and compliant, and no assurance that the business can return to post-bankruptcy
- imposition of restrictions by the court on the debtor’s business officials (directors,
officers, major shareholders, etc.); and
- approval of the court has to be sought to perform activities not covered by the approved
What Makes a Good Reorganization Plan?
The reorganization plan of the debtor will most likely be confirmed if the following requirements are met:
- feasibility (the plan will not result in liquidation of assets unless a liquidation plan is proposed);
- proposed in good faith; and
- compliant with all the provisions of the Bankruptcy Code.
Liquidation of assets may be resorted to when debtor believes value can be created by this process. Chapter 11 provides more flexibility than Chapter 7 on assets liquidation.
Discharge of Debt in Chapter 11
Upon the confirmation of a reorganization plan, all debt incurred before the confirmation date is discharged. The debtor will then execute the repayments stipulated in the plan. The reorganization plan serves as new agreement between the debtor and the creditors.
Under certain conditions, discharge of debt in Chapter 11 may not be applicable:
- if the reorganization plan is a liquidation plan; or
- unless all payments are made to creditors.
Freedom Law Firm is here to help.
Bankruptcy is often the last but necessary resort. It is a delicate and complex proceeding, and you want someone with plenty of experience to consult with and guide you through the process and help you determine the scope of the discharge.
In many cases, unless a party in interest files a complaint objecting to the discharge, the bankruptcy court may issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.
If you would like to find out whether bankruptcy is the right option for you, please request a call-back by submitting a short online form. All initial consultations are free and confidential.