What is Chapter 11?
Chapter 11 is very complex, expensive, and the successful completion rate is not very high. A Chapter 11 should not be entered into lightly and all other options should be explored before pursuing a reorganization under Chapter 11.
Chapter 11 will allow a business to continue to operate as a “debtor in possession.” This means the debtor is charged with dealing with the business property and business operations for the benefit of the business creditors and interest holders. There are very strict rules to how a business must operate while operating as a debtor in Chapter 11 bankruptcy, especially when it comes to cash or cash collateral (property easily converted to cash).
Individuals are also eligible to file for Chapter 11 bankruptcy relief. If an individual’s debts exceed the Chapter 13 debt limits, Chapter 11 may be the only reorganization option available to that individual (or married couple).
There are several different types of Chapter 11 cases available to choose from and as of 2020 a new “Subchapter V” option which is meant to make Chapter 11 more accessible to business debtors.
A Chapter 11 is the main option for most businesses that want to and reorganize through bankruptcy.
Benefits of Chapter 11
Creditors Must Cease Action
When filing Chapter 11, the business’s or individual’s creditors must immediately cease all actions against the debtor and debtor’s property.
Get Some Breathing Room
This “automatic stay” can give the business or individual some much-needed breathing room to make the necessary changes to get back on track.
The debtor receives a moratorium of several months on the payments of its debts.
Disadvantages of Chapter 11
Costs and Additional Burdens
Chapter 11 is very expensive and the strict requirements on the debtor are burdensome. It can be difficult to successfully handle both the bankruptcy requirements and the operation of a business that is already facing challenges. If a business can be classified as a “small business debtor,” some of the requirements of Chapter 11 are less burdensome.