What is Chapter 11 bankruptcy?

Prelle Eron & Bailey has a substantial Chapter 11 bankruptcy practice. Chapter 11 is by far the most versatile of all bankruptcy chapters. Unlike the other chapters of bankruptcy, Chapter 11 Bankruptcy does not have a mandatory trustee to supervise the bankruptcy case. Instead, the debtor is placed “in possession” of the estate, giving the debtor a level of control not found anywhere else.

Chapter 11 bankruptcy is designed to allow a business to restructure its debt and reorganize its operations. Chapter 11 is the only place where a business entity may receive a bankruptcy discharge, and even then the discharge is limited to successful reorganizations.

That being said, Chapter 11 is neither limited to businesses, nor to reorganizations. Chapter 11 can be used by individuals and can be used to close a business. Reasons for filing Chapter 11 bankruptcy may include the following:

• Obtaining short-term relief from debt service payments.
• Restructuring secured debts to lower interest rates and change repayment terms.
• Rejecting unfavorable contracts and retaining beneficial ones.
• Shutting down a business and transferring its assets/operations to another business entity
• Changing the nature of the business by shedding unprofitable elements.
• Recovering assets taken by creditors shortly before filing.
• Paying back taxes over five years.
• Stripping secured debts to the value of the collateral.
• Discharging large amounts of unsecured debt.
• Liquidating a business in an orderly and efficient manner.
• Much more!

Many of the Chapter 11 cases filed in Kansas are filed by individuals. There are far too many reasons to list for individuals to file Chapter 11. However, they fall into three basic categories.

First, individuals with sole proprietorship businesses frequently need to reorganize the business. Chapter 11 allows individuals to do this while continuing to operate their businesses free from the interference of a court appointed trustee (in most cases).

Second, individuals with unusually large asset bases or sole proprietorship businesses may need to liquidate under Chapter 11. Unlike Chapter 7 liquidation, where a court-appointed trustee controls the sale of assets, Chapter 11 allows the debtor to control the order and time frame for the liquidation of their assets in order to satisfy creditors. This can result in greater liquidation prices and the retention of assets necessary for the debtor’s continued viability.

Third, some individuals are ineligible for Chapters 7 or 13 due to high income and large amounts of debt, respectively. For them, Chapter 11 is the only option. Prelle Eron & Bailey has experience with these types of Chapter 11 cases and understands how to keep costs down in “consumer 11’s.”

Chapter 11 bankruptcy cases may last between a month and 20 years, completely depending on the situation. The cost of a Chapter 11 case typically makes it a place where only businesses (or individuals with larger sole proprietor businesses) file. Attorney’s fees, court costs, and out of pocket expenses always run into the tens of thousands of dollars and for cases on the larger side can run into six figures. If the business cannot generate cash flow to cover these expenses (either through ongoing operations or liquidation of assets), Chapter 11 will not be an option.