What Is Chapter 11 Bankruptcy and Who Can Get It?

By Nikolina Cveticanin

June 19, 2023

When running a business or reviewing our personal finances, more often than not, we find ourselves lacking funds for something. If it’s something luxurious, most of us simply won’t get it unless it’s absolutely necessary. After all, bad credit loans are something all of us try to avoid. Still, when we need something for our company to grow, we’ll try to get a loan.

The more money we need, the bigger the loan’s drawbacks. So what happens if we can’t pay those loans back? Bills and debts start piling up, and you don’t know which way is up anymore. If you’ve drained every option and even bad credit loans are no longer an option, it might be time to declare bankruptcy.

Is that the right choice for you, and how will you get back on your feet afterward? Well, the US government came up with a few solutions, one of them being Chapter 11. But what is Chapter 11 bankruptcy?

Chapter 11 ​​Bankruptcy Explained

By definition, Chapter 11 bankruptcy involves reorganizing a debtor’s assets, debts, and business affairs, which is why it’s also known as “reorganization” bankruptcy. Although it’s available to individuals and businesses alike, it’s mostly used by companies.

Commonly, the debtor is allowed to keep their possessions, is viewed as a trustee, may continue to run their business, and (with court approval) borrow money again. When a reorganization plan is developed and proposed, creditors vote on it; if it passes and fulfills specific legal prerequisites, it is approved by the court.

The purpose of the Chapter 11 bill was to help businesses regroup and set up a strategy for the future. This plan may contain modifying payment due dates and interests and can even remove a debt entirely.

How Does Chapter 11 Work?

All bankruptcy chapters, including Chapter 11, halt the collection process. Once filed, the “automatic stay” forbids most creditors from hunting you, giving you enough room to breathe and figure out your next move. This temporarily stops:

• Payment demands
• Removal or any kind of foreclosure
• Collections trials
• Till taps, property confiscation, bank levies

Unlike other chapters, Chapter 11 allows the debtor to act as the trustee, meaning that they can continue everyday business functions as a “debtor in possession” while Chapter 11 restructuring takes place.

However, the business can not make all decisions without court permission. Restricted decisions include sales of any assets other than inventory, creating or closing a rental agreement, taking out new loans, and controlling business operations.

The court also controls payment decisions and contracts related to attorneys, vendors, and unions. Ultimately, the debtor cannot take out a loan that will begin after the bankruptcy is complete.

Is Chapter 11 the Best Bankruptcy Option for You?

There are nine chapters in Title 11 of the US Code, each focusing on different bankruptcy strategies. Chapters 1, 3, and 5 explain the legalities of bankruptcy for all parties involved, including the debtor, creditor, and court. 

The other chapters explain who can file for bankruptcy and how to do so according to who they are or whom they represent:

• Chapter 12 is for family farmers or family fishers with regular income. 
• Chapter 15 is used in international cases.
• Chapter 13 is for individuals with stable income and has certain debt restrictions.
• Chapter 7 is the liquidation bankruptcy chapter for people who cannot create a reorganization plan and provides them with information on liquidating their remaining assets.

How to File for Chapter 11 Bankruptcy

Now that Chapter 11 bankruptcy has been explained, let’s go over the procedural part. It begins by filing a petition at the debtor’s residential area or incorporation location’s federal bankruptcy court. It may be a voluntary petition, filed by the debtor, or an involuntary one, filed by creditors that meet specific requirements.

Then, the creditors vote if the plan within the petition is acceptable. Since the next option is usually filing for a Chapter 7 bankruptcy, meaning liquidation, creditors are typically cooperative.

However, if a creditor objects to the plan, the court will get the input from creditors and other interested parties, before deciding on the best course of action. The determining factors include:

• Success probability
• Good faith
• The creditors’ best interest
• If it is fair and equitable

So how long does Chapter 11 take? Well, there are technically no limitations. Some cases take only a few months, but it often takes six months to two years for a case to close.