Chapter 11 allows individuals and businesses to liquidate or reorganize their debts. Chapter 11 is different from Chapter 7 or Chapter 13 bankruptcy cases. Chapter 11 usually involves higher amounts of money about the assets and liabilities of the individual and business.
Both individuals and businesses can use Chapter 11 to resolve their debts. You can organize the debts in your name as an individual debtor to help you restructure your finances, protect your assets, and pay off your creditors. You can still organize the debt if you file as a company, but only for the business debts.
Individuals rarely file Chapter 11 cases. Individuals rarely file Chapter 11 cases. However, they do so for either real estate investment reorganization (or reorganization of unsecured debts which are too high to be eligible for Chapter 13 relief).
Chapter 11 is an effective tool for real estate investors that allows them to rewrite mortgages. Chapter 11 allows you to reduce principal balances to the property’s value. This would lower the mortgage to $100,000 from $50,000.
Chapter 11 allows you to reduce your interest rate and extend your term of repayment. Chapter 11 is often used to extend the term up to 360 months (30 years). This allows you to pay less monthly and makes the property more profitable.
To reorganize and repay debts under a repayment plan, most people use Chapter 13 bankruptcy. Congress has set a limit on the amount of debt that you can qualify for Chapter 13. For unsecured debts, the current Chapter 13 debt limit is $360 475. You can file Chapter 11 bankruptcy if your total unsecured debt exceeds this limit.
Chapter 11 is a way to pay off your unsecured debts and restructure them. It’s similar to Chapter 13. Each of your creditors will receive a monthly payment. Once you have made all your payments according to the court-approved plan, the judge will issue a discharge. This will relieve you of any future liabilities.
Chapter 11 cases involve restructuring multiple types of debt such as priority tax debt, secured and unsecured debts, and leasing, all while protecting the business assets.
Chapter 11 is a helpful tool for reorganizing past due taxes your company has incurred. You can restructure debts like income taxes, property taxes, and payroll taxes to enable you to continue operating your business while also meeting your tax obligations. Most tax obligations are paid over a five-year period. Chapter 11 gives you the option to negotiate repayment terms with the taxing authority.
Chapter 11 allows a business debtor the ability to reorganize secured loans in a similar way to individual cases. You will identify the secured debts that are most important to your business’s profitability and the collateral. You may then, much like Chapter 11, seek to pay the actual value of the property rather than what you owe. Real estate, business equipment, vehicles, and other collateral are all examples.
If you own 20 work trucks worth $200,000 but owe $500,000, the court can allow you to only pay the collateral’s value and not what you owe. This will allow your business to lower its monthly operating costs and increase its profitability.
While company credit cards, signature loans, and other general unsecured loans may help to offset ongoing costs and upstart expenses, they can also be a significant burden on future profits margins. Chapter 11 allows you the option to restructure your unsecured debt and pay it off with the company’s profits. This can be done either as a lump sum at your case’s conclusion or over a period of years. In the ideal scenario, you and your unsecured creditors would agree on how much and when to pay. If there is no agreement between the parties, the judge will determine what is fair. You will be bound by that decision.
Chapter 11 allows you to reject or accept your executive contracts and leases. Imagine that you own a hotel and have previously contracted with a cleaning company for five years. You discover that similar services can be obtained for half the cost, increasing your business’ profitability. You can terminate the contract with the cleaning service by filing Chapter 11. The court may allow you to search for a cheaper service. The judge will approve the new contract as long as the service and contract are compatible with the business’ profitability.
A lease of office space by your company is another example. The same office space could be leased for twice the amount you originally signed. You must confirm your intention to keep the lease within a specified time period after filing bankruptcy. Otherwise, you will be deemed to have rejected the lease. You could lose a lot of time and money if you fail to act. The bankruptcy judge will not be able to correct your error.
Chapter 11 bankruptcy is like a contentious election. Every class of creditors, priority, secured and unsecured, can vote on whether you accept or reject their proposed bankruptcy treatment. The court will allow you to solicit votes after the hearings. The judge will approve the plan if you receive a vote of approval from each creditor. To obtain acceptance, you will need to negotiate different terms with each creditor. Be prepared to compromise.
If a creditor rejects your plan, it could be a significant impediment to the court’s approval. If negotiations fail, the judge will approve your case. This is known as “cramdown” because it asks the judge to force the terms of your plan down on the non-accepting creditor.
You should be able to restructure individual or corporate debts in bankruptcy if you negotiate with each creditor.
This article was written by Alla Tenina. Alla is one of the best Bankruptcy Attorney in Sherman Oaks, and the founder of Tenina law. She has experience in bankruptcies, real estate planning, and complex tax matters. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.