Traditional Chapter 11
Traditionally, a business may proceed under a Chapter 7 bankruptcy, described above, or a Chapter 11 case. Chapter 11 is basically the business equivalent of a Chapter 13 for individuals.
Filing Chapter 11 bankruptcy basically means you’re submitting a reorganization plan to restructure your debts to help you repay your creditors over time. It’s most often used by large businesses, but it can also help certain people and small-business owners. Chapter 11 is a more complicated bankruptcy filing, but can be useful if you don’t qualify for Chapter 13.
If you’re filing Chapter 11 bankruptcy as a business, it helps you create a plan to keep your business active while paying all your creditors over a set period. When a business files a petition for Chapter 11 with the court, it may be voluntary or involuntary. A voluntary petition is filed by the business, but an involuntary petition is filed by the business’ creditors once certain requirements have been met.
You have approximately four months to come up with a reorganization plan after filing your petition, but in some cases this time frame may be extended up to 18 months. When creating your reorganization plan, you place each of your creditors into its own class. Unsecured debts are placed in a separate class and never lumped with any other debts. Priority for repayment is placed on certain debts, which means these are paid before others. The debt obligations may be restructured, in some cases reduced, or payoff time extended, and a payment plan set up to pay off and settle the debts. An administrator, known as a U.S. trustee, appointed by the courts supervises and works closely with the business until debts are settled. The administrator regularly reviews the business operations and finances and works with the petitioner and the courts until the case is closed. While there is some control, there is truly more power in the creditors who form a committee and the trustee than the debtor.
DIFFERENCES BETWEEN THE BANKRUPTCIES
The basic difference between Chapter 7 and Chapters 11 & 13 bankruptcy procedures is the means by which debt relief is achieved. Chapter 7 proceedings can be thought of as liquidation. The debtor's property is sold with proceeds going toward outstanding debts. Chapter 11, more often used by businesses than individuals, permits the business to reorganize and service debts over time, while maintaining an operational business enterprise. Chapter 13 proceedings provide an opportunity for individuals to reorganize finances and pay off debts in an allotted amount of time.
The biggest difference between Chapter 11 and Chapter 7 is Chapter 11 is a reorganization bankruptcy and Chapter 7 is a liquidation bankruptcy. This means that, in Chapter 7, you’re required to sell your assets to pay as many creditors as possible.
Chapter 11 lets you negotiate with your creditors to modify the terms of your debts and create a repayment plan without having to sell your assets. While individuals and businesses can utilize either type of bankruptcy, Chapter 7 is typically favored by individuals. Chapter 11 is geared more towards business owners.
Notable differences between Chapter 11 and Chapter 13 are eligibility requirements. Chapter 11 is open to almost any individual or business without any specific income or debt-level limits. Chapter 13 requires you to have a stable income, has specific debt limits and is reserved for individuals or, in limited cases, sole proprietorships. Chapter 13 also includes the appointment of a trustee who collects and distributes payments to your creditors, which is seldom done in Chapter 11.
Despite the differences, there are also several similarities. Both Chapter 11 and Chapter 13 let you keep certain assets you might lose under Chapter 7 bankruptcy. Both may offer more help with car loans, mortgages and other types of unsecured debt. Under Chapter 7, if you’re behind on these payments and can’t catch up, you may lose the property
- Chapter 7 bankruptcy doesn’t require a repayment plan but does require you to liquidate or sell nonexempt assets to payback creditors.
- Chapter 11 bankruptcy is a reorganization plan most often used by large businesses to help them stay active while repaying creditors.
- Chapter 13 bankruptcy eliminates debts through a repayment plan that lets you pay back a portion of your debt over a three- or five-year period.
- Chapter 7, Chapter 11 and Chapter 13 bankruptcies all impact your credit, and not all your debts may be wiped out.