Understanding Bankruptcy
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Chapter 11 Bankruptcy: Understanding the Basics

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Business owners and individuals struggling under the weight of debt may find new life under chapter 11 bankruptcy. Chapter 11 bankruptcy is commonly called reorganization bankruptcy because it allows businesses to continue operating while the business owner and creditors reorganize the debts, so the business can be profitable once again.

However, keeping a business running isn’t the only reason to consider chapter 11 bankruptcy. This guide explains how chapter 11 bankruptcy works, and when business owners and individuals may want to consider filing.

What is chapter 11 bankruptcy?

How does a business operate during chapter 11 bankruptcy?

What happens to debts under chapter 11 bankruptcy?

What happens to assets under chapter 11 bankruptcy?

When does filing chapter 11 bankruptcy make sense?

Benefits of chapter 11 bankruptcy

Risks associated with chapter 11 bankruptcy

Eligibility requirements for chapter 11 bankruptcy

The chapter 11 bankruptcy process

Comparing chapter 7 and chapter 11 bankruptcy

Alternatives to bankruptcy

Does chapter 11 bankruptcy make sense for you or your business?

What is chapter 11 bankruptcy?

Chapter 11 bankruptcy is commonly called reorganization bankruptcy. It allows a business to continue operations while the business makes a plan to repay or discharge its debts. The plans are designed to keep the business operational during and following chapter 11 bankruptcy.

A lot of people think of chapter 11 bankruptcy as bankruptcy for big businesses. After all, many large corporations — from Toys R Us to Kmart — have filed chapter 11 bankruptcy. However, small business owners who want to keep a business running but need some debt relief may also benefit from filing chapter 11 bankruptcy.

A business owner with a viable business that is struggling under the burden of debts or past due taxes may get the relief they need by filing chapter 11 bankruptcy.

“For small business owners, chapter 11 makes a lot of sense when things have been bad, but are getting better,” Philip Sasser, a Raleigh, N.C.-based bankruptcy attorney told LendingTree.

Most small business owners who want to continue running their businesses will maintain ownership of their operations during chapter 11 bankruptcy.


How does a business operate during chapter 11 bankruptcy?

During chapter 11 bankruptcy, a business remains operational, and the business owner can continue to make most decisions about how to maximize sales and profit for the business. The business can sell inventory and is generally free to purchase materials to complete new contracts.

However, small business owners face some important limitations. For example, they must seek permission to sell assets (except inventory) and to start or end rental contracts. The court also must approve the employment of lawyers or other service providers in connection with the bankruptcy.

Business owners also have to provide monthly reports that keep the courts abreast of the business’s financial situation. Reports generally include business income and an expense report.

What happens to debts under chapter 11 bankruptcy?

Unlike other types of consumer bankruptcy, chapter 11 bankruptcy does not strictly define what will happen to debts. Certain types of debts (such as student loans, unpaid child support, and unpaid taxes) are not dischargeable. That means the chapter 11 plan must include a plan to pay those back (if they are part of the bankruptcy). A business that owes back taxes has to repay them within five years.

Outside of excluded debts, it is up to the person or entity filing bankruptcy to propose a plan to pay back some or all of the debts. Typically, these debts may be paid back partially or in full over the course of several years.

Some debts may be completely discharged.

“It’s typical for repayment plans to last five years,” Sasser told LendingTree, “but I’ve seen plans go all the way to 10 years. The plan will really depend on the situation.”

What happens to assets under chapter 11 bankruptcy?

Under chapter 11 bankruptcy, a business or person generally gets to keep most of their assets if they want to do so.

However, someone filing chapter 11 bankruptcy could propose to sell many of their assets as part of the reorganization plan. In fact, a business owner could sell the entire business under chapter 11 bankruptcy.

It’s important to note that in chapter 11 bankruptcy, an individual’s personal assets may be used to pay creditors in the bankruptcy case. Owners of corporations do not have to worry about having their assets included in the case. However, sole proprietors or partners in a partnership may have their assets included in the bankruptcy case. This doesn’t mean that they will automatically lose their personal assets. It simply means that the assets may not be perfectly protected.

When does filing chapter 11 bankruptcy make sense?

Chapter 11 bankruptcy is a useful, but an expensive tool. Here are some situations where it might make sense.

Small businesses

Small business owners who want to keep their business running may get debt relief from chapter 11 bankruptcy. “Bankruptcy only helps out with the debt side, not the income side,” Sasser said. “If you’re struggling to bring in revenue, chapter 11 won’t really help your business.”

Large businesses

Large businesses that want to prevent the sale or liquidation of the company may be able to reorganize and shed enough debt to continue operating for shareholders.


If a debtor owes a lot of money to a creditor, and the debtor isn’t paying, the creditor may be able to force the debtor into involuntary chapter 11 bankruptcy.


Individuals with debts that exceed the chapter 13 bankruptcy limits ($394,725 in unsecured debts and $1,184,200 in secured debts) may file chapter 11 bankruptcy. But this isn’t the only reason to file chapter 11 bankruptcy. People with smaller debts may choose chapter 11 if expected fees for chapter 11 bankruptcy are less than the expected commissions for chapter 13 bankruptcy.

Benefits of chapter 11 bankruptcy

Chapter 11 bankruptcy generally allows a business owner to maintain ownership of their business. This is the No.1 advantage of chapter 11 bankruptcy compared with chapter 7 bankruptcy, which requires a business owner to liquidate the company or sell it entirely to pay off debts.

Individuals facing bankruptcy may see several advantages of declaring chapter 11 bankruptcy as opposed to chapter 7 (liquidation bankruptcy) or chapter 13 bankruptcy.

No debt limits.

Under a chapter 11 bankruptcy, an individual isn’t bound by the debt limits of chapter 13 bankruptcy. (To declare chapter 13 bankruptcy, you must have less than $394,725 in unsecured debts and $1,184,200 in secured debts).

It can be cheaper to file chapter 11.

In some cases, individuals who could file chapter 13 bankruptcy may find that it’s actually less expensive to file chapter 11 bankruptcy since the filer won’t have to pay commissions to the plan trustee.

Longer debt repayment timeline.

Another advantage of chapter 11 bankruptcy is that individuals aren’t limited to the time constraints of chapter 13 bankruptcy. In general, Chapter 13 bankruptcy repayment plans involve three years of repayment and plans never extend more than five years. In a chapter 11 filing, people can extend the repayment plan over a much longer period of time, sometimes as long as a decade.

Assets can be kept.

Chapter 11 bankruptcy also has advantages over chapter 7 bankruptcy for individuals. Under chapter 7 bankruptcy, an individual will have to sell off most of their personal assets, but under chapter 11 bankruptcy that person can keep the assets.

Risks associated with chapter 11 bankruptcy

Although chapter 11 bankruptcy may be the right choice, Sasser called the process, “Time consuming, expensive, discouraging.”


The biggest risk to declaring chapter 11 bankruptcy is the higher costs. In general, chapter 11 bankruptcy has much higher lawyer’s fees compared with other forms of bankruptcies. Most individual or small business will spend at least $10,000 in lawyers fees when declaring chapter 11 bankruptcy, and the costs could run as high as $100,000 or more, according to Sasser. By comparison, a chapter 7 bankruptcy and chapter 13 bankruptcy can cost $2,000 or under on average.

“The plan under chapter 11 offers a lot of leeways and a lot of room for creativity,” Sasser explained. “That’s one reason it’s so expensive to file chapter 11 bankruptcy.”

Less predictable.

Chapter 11 bankruptcy is also less predictable than chapter 7 or chapter 13 bankruptcy. Those types of bankruptcy have clear formulas for how an individual or business will repay its debts. Chapter 11 bankruptcy offers much more leeway, which could translate to risk. A person or business may have to pay back debts for a long time, or they may have fewer debts discharged compared with other chapters. Technically, a small business owner could be forced to sell or liquidate their company, but this is rare, except in cases of gross mismanagement or fraud.


Finally, chapter 11 bankruptcy may take up a lot of time. Business owners have to prepare monthly statements about business income and expenses. Filers have to attend several meetings and spend time making plan proposals. While chapter 7 and chapter 13 bankruptcy last for a few months, according to Derek Caldwell, a Raleigh, N.C. attorney. By contrast, chapter 11 bankruptcy can drag on for a year and a half or more.

Eligibility requirements for chapter 11 bankruptcy

Who can file: Individuals, businesses, and corporations may all file chapter 11 bankruptcy.

Counseling:  Before filing any type of bankruptcy, including chapter 11 bankruptcy, individuals must receive credit counseling. Aside from these requirements, any person or business may file chapter 11 bankruptcy. In fact, even creditors may file a petition for involuntary bankruptcy, but they can only do so if they have a valid debt claim of at least $15,775, and the debt is generally not being paid.

The chapter 11 bankruptcy process


Every chapter 11 case starts with someone filing petition for bankruptcy. Most of the time, the person or business in debt will be the one to file this petition. You must pay $1,717 to file a chapter 11 petition for bankruptcy.

If you are not paying your debts, a creditor could file an involuntary Chapter 11 bankruptcy against you.

Automatic stay

As soon as the bankruptcy petition is filed, debtors are granted an automatic stay of creditor actions against them. That means that your creditors cannot do anything to collect or enforce existing liens against you.

An automatic stay gives chapter 11 filers some breathing room while they work out a plan to repay their debtors.

Debtor in possession

The debtor in possession is the person or entity that files bankruptcy. In chapter 11 bankruptcy, the debtor in possession takes a very active role in the bankruptcy process. In fact, most of the time the debtor in possession will act as the bankruptcy trustee in the case.

This means the debtor in possession is responsible for meeting reporting requirements and for proposing a reorganization and repayment plan that suits the law. On top of that, the debtor in possession retains the right to operate their business with limited oversights from the court.

Meeting with creditors

Shortly after filing bankruptcy, a committee of creditors will be appointed by the U.S. Trustee. The committee will usually include unsecured creditors who hold the seven largest claims against the debtor in possession. Of course, if you or the business has fewer than seven debts, the committee will be smaller.

The debtor in possession and the committee of creditors will meet at a “section 341 meeting.” These meetings give the committee of creditors and the debtor in possession the opportunity to negotiate a reorganization plan. The reorganization plan will include a plan for keeping the business operational and repaying the creditors.

Plan proposal

The plan of reorganization is at the heart of the chapter 11 bankruptcy. The plan for reorganization allows a business or an individual to keep their assets while repaying some of their debts over time. Business owners may also opt to sell some or all of their assets to fulfill debt obligations.

A debtor in possession has at least 120 days to exclusively file a plan of reorganization. However, that can be extended to 18 months at the most. After that, creditors can jump in and propose plans of their own.

A plan must be accepted by a majority of creditors (and account for at least two-thirds of the debts owed).

For the courts to accept the plan, the courts must agree that the debtor in possession can reasonably make the monthly payments associated with the plan. The plan must be in the best interest of the creditors, and provide them more money than what would have been provided under chapter 7 bankruptcy. It must be fair and equitable and be proposed in good faith.

Unlike repayment plans in chapter 13 bankruptcy or liquidation plans in chapter 7 bankruptcy, the actual reorganization plan will be uniquely tailored to the circumstances of the debtor and the creditors. The only hard rule is that taxes must be paid within five years, and the plan must meet the requirements listed above. Outside of that, courts wide scope in how the plan can be implemented.

Acceptance of plan

For a plan to be accepted, at least half of the creditors have to accept the plan, and those creditors must hold at least two-thirds of the total amount of debt in the case.

Getting the committee of creditors to accept the plan may take quite a bit of negotiating. Debtors in possession and the committee of creditors may meet in “section 341 meetings” to hammer out details of a plan that fulfills as many of the creditors’ claims as possible while keeping the payments reasonable for the debtor in possession.

Confirmation of plan

Once a sufficient number of creditors agree to the plan, the bankruptcy trustee will call a confirmation hearing. This is a meeting where the court approves the plan. In general, a plan that has been accepted by the creditors and meets statutory requirements will be approved by the courts.

Once the plan is approved, the repayment period begins.

Plan repayment

Once a plan is in place, it will be implemented by the debtor in possession. Usually, this means that the debtor will make monthly payments until the plan obligations are fulfilled. In some cases, the plan may entail the debtor selling certain assets and disbursing the funds to creditors. The plan repayment phase may last several years.

Debts are discharged

Once the debtor has fulfilled the obligations in the plan, the remaining debts are discharged. That means that the debtor no longer owes the debt, and creditors cannot make an effort to collect them.

Cost of filing chapter 11 bankruptcy

It costs $1,717 to file chapter 11 bankruptcy, but the real costs start when you pay attorney’s fees. Attorneys fees for an individual chapter 11 bankruptcy cost at least $10,000, and could go much higher, Sasser said. Typical fees for small business chapter 11 bankruptcy run from $15,000-$30,000, but could go as high as $100,000, depending on the complexity of the case.

The high costs of attorney’s fees make chapter 11 bankruptcy relatively unappealing except in cases involving a large amount of debt. If chapter 11 bankruptcy makes sense in your situation, compare fees from multiple lawyers. You may be able to find a less expensive lawyer who is equally qualified to represent you.

How long does it take?

A person or business filing bankruptcy has a maximum of 18 months to propose a reorganization plan before creditors can step in and take an active role in proposing a plan. In practice, small business owners and individuals should be able to have an approved plan before the 18-month window closes.

The repayment phase of chapter 11 bankruptcy can take a short time (as with the sale of a business), or it can take years. It is not specifically limited to a certain payoff period, but a five-year repayment plan is common.

Comparing chapter 7 and chapter 11 bankruptcy

Small business owners (with partnerships or corporations) must decide between chapter 7 and chapter 11 bankruptcy. Chapter 11 bankruptcy allows the owner to continue operating the business while reducing debts. Chapter 7 bankruptcy requires the business to liquidate its assets to repay creditors. However, this isn’t the only difference between the bankruptcies. Business owners (and individuals) should consult with a bankruptcy attorney before deciding whether bankruptcy makes sense for their business.


Chapter 7 vs Chapter 11
Chapter 11 Chapter 7
Cost $1,717 to file

$10,000- $100,000 in attorney’s fees.
$335 to file

$1,300-$1,400 in attorney’s fees on average.
Typical debt sizes At least $100,000 and up to several million dollars of debt. Debts below $100,000 in most cases. Debt loads can be much larger if the business is no longer viable.
Effects on credit Sole proprietors and individuals will see bankruptcy on their credit report for up to 10 years after filing.

Partners and corporation owners should not see the effects of bankruptcy on their credit score (since it is the partnership or corporation filing for bankruptcy).
Sole proprietors and individuals will see bankruptcy on their credit report for up to 10 years after filing.

Partners and corporation owners should not see the effects of bankruptcy on their credit score (since it is the partnership or corporation filing for bankruptcy).
Eligibility All corporations, partnerships, sole proprietors and individuals may file.

Creditors may file for involuntary bankruptcy against businesses or individuals if they are owed at least $15,775 and are not being paid.
Most corporations, partnerships, and most sole proprietors may file.

Individuals must meet means testing to qualify for chapter 7. In general, individuals must earn less than their state’s median income to qualify for chapter 7 bankruptcy.

Creditors may file for involuntary bankruptcy against businesses or individuals if they are owed at least $15,775 and are not being paid.
Liquidation or reorganization Reorganize business and finances. Generally keep most assets. Liquidate most assets.
What happens to personal assets? Generally, can make a plan to keep personal assets.

Whether personal assets count toward repayment requirements depends on entity type. Partnerships and sole proprietors may be required to include personal assets when calculating the total amount of bankruptcy repayments.
Individuals’ personal assets will be sold and used to pay off debts (up to federal limits).

Assets of business will be sold and used to pay debts.

The sale of owners’ personal assets depend on entity type. Partnerships and sole proprietors may be required to liquidate personal assets.

Chapter 11 vs chapter 13

Additionally, in a limited number of cases, some individuals with complex finances or a large amount of debt may find chapter 11 bankruptcy cheaper than chapter 13 bankruptcy, which is the typical bankruptcy for high-income individuals. Lawyers fees for Chapter 11 bankruptcy are far more expensive than fees for chapter 13 bankruptcy (at least $10,000 versus $1,800), but in some cases, the total cost of chapter 13 bankruptcy can exceed the total cost of chapter 11 bankruptcy. In cases involving large debt loads, bankruptcy commissions may lead to chapter 13 bankruptcy exceeding the cost of chapter 11 bankruptcy.

Under chapter 13 bankruptcy, debtors have to pay a commission to a bankruptcy trustee (up to 5% of the total payment). By contrast, debtors administer bankruptcy payments themselves under chapter 11 bankruptcy.

Even with the higher lawyer costs of chapter 11 bankruptcy, some individuals will come out ahead as compared with chapter 13.

“If you’re an individual dealing with large dollar amounts or a complex financial situation, seek out a lawyer who specializes in all three types of bankruptcy [chapter 7, chapter 11 and chapter 13], so you know you’re doing the right thing,” Sasser said.

Alternatives to bankruptcy

If your business is facing financial trouble, you may have options other than declaring bankruptcy. These are a few of the common ways that businesses and individuals can find debt relief without declaring bankruptcy.

Negotiating outside of court

If your business is struggling under the weight of a single debt, you may be able to negotiate a debt reduction or a new repayment schedule outside of bankruptcy court. This can be quicker and less costly than an expensive chapter 11 bankruptcy. However, a business struggling with multiple debts may find that filing bankruptcy helps the business negotiate with multiple creditors at once.

Selling the business

If your business is viable, you may be able to sell the business and pay off the existing debts. If you’re considering selling a financially troubled business, you may still want to consult a bankruptcy attorney. A business may be able to clear debts by selling the business as a “going-concern” under chapter 11 bankruptcy law.

Closing shop

A business with very few real assets and a lot of debt may not need to go through the hassle of declaring bankruptcy. By closing shop, the business will default on its debts, but creditors may not go after the difference. It’s important to consult with a bankruptcy attorney and a credit counselor before choosing this option since it could have adverse consequences (and you may still owe certain debts, such as taxes or debts that carry a personal guarantee).

Free consultations

In many parts of the country, lawyers offer free consultations to individuals or business owners who are considering bankruptcy. Sasser urges people to take advantage of these free consultations since lawyers may be able to recommend a unique solution that will help avoid bankruptcy. These consultations also give people an opportunity to compare costs of several lawyers.

Does chapter 11 bankruptcy make sense for you or your business?

If you or your business is facing financial difficulty, set up a consultation with a local bankruptcy attorney. Be sure the attorney has experience with chapter 7, chapter 11 and chapter 13 bankruptcy, so he or she can make a solid recommendation for your case. Bankruptcy isn’t always the right option, but it could help you or your business get the debt relief you need.


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