Corporations, limited liability companies, partnerships, and sole proprietors that cannot meet their financial obligations may file for a Chapter 11 bankruptcy. In rare cases, individuals could file for Chapter 11 bankruptcy if they are ineligible for personal bankruptcy through Chapter 7 and Chapter 13.
At Luftman, Heck & Associates LLP, we know it only takes one change in life to throw you into financial chaos. Our bankruptcy lawyers can advise you on how to move forward, including whether filing for Chapter 11 bankruptcy is a smart move.
Overview of Chapter 11 Bankruptcy in Ohio
Chapter 11 is known as a “reorganization bankruptcy.” During this process, your business stays open, but you restructure your debts and assets to pay your debts. If you complete your responsibilities under the reorganization plan, you or your business will get a fresh start.
Chapter 11 bankruptcy does not wipe away your debt. Instead, you formulate a plan that is in your creditors’ best interests, such as:
- Selling assets to pay your bills
- Downsizing areas of your business to save money
- Restructuring debts, perhaps at lower interest rates
- Other financial reorganization changes
If you don’t suggest a repayment plan, your creditors will. Sometimes, a struggling business and creditors compromise on choosing the best path forward. The court approves the plan, and a trustee oversees the process, which could take months or years to complete.
Though this sounds simple, Chapter 11 is a complicated process. Therefore, it’s essential to work with a Chapter 11 bankruptcy attorney to protect your liability and guide you through.
Should You Consider Chapter 11 Bankruptcy?
A benefit of filing for Chapter 11 is keeping your business open and running, which is called a “debtor in possession.” A Chapter 11 bankruptcy is one of the most complicated bankruptcy forms, and it typically costs more than Chapter 7 or 13.
If you or your business is struggling, you should consider the legal costs of this process. You’ll have to file monthly operating reports and pay quarterly fees to the trustee based on your expenditures.
What To Know About Chapter 11
- If you keep running the business, you can’t make all the decisions. You must get the court’s approval for particular business decisions, like expanding or ceasing business operations.
- A trustee might step in to run the business if there are allegations of fraud or gross incompetence.
- There are additional restrictions, too, which is another reason to consult an attorney first.
But if you want to say in business, talk with a Chapter 11 lawyer. Our team at Luftman, Heck & Associates will explain your options. If bankruptcy is the best path now or down the line, we can help you prepare.
The Challenges of Chapter 11
Chapter 11 takes careful consideration. We discuss some of the most common elements of Chapter 11 below. However, each situation is unique. A Chapter 11 bankruptcy lawyer can review your income, assets, and debts and offer an honest opinion about whether it may work for you.
Eligibility for Chapter 11
There are no specific income or debt requirements for Chapter 11 bankruptcy unless you wish to file a small business. You don’t need a minimum amount of debt, and there’s no cap on how much debt you can have. You also don’t need regular income to file.
However, your reorganization plan must address how you will bring in funds to pay your debts, including selling assets and shuttering portions of your business.
If you’re a small business, then you may have some flexibility. You can file under the:
- Small Business Reorganization Act of 2019 (subchapter V)
- Bankruptcy Abuse Prevention Consumer Protection Act of 2005 (a small business case)
Both of these options have different eligibility criteria and debt limits. The Coronavirus Aid, Relief, and Economic Security Act temporarily increased the debt limit for subchapter V cases to $7,500,000. This debt extension ends on March 27, 2022, when it reverts to subchapter V levels.
Steps in the Chapter 11 Bankruptcy Process
The Bankruptcy Petition
You start by filing the petition in the federal bankruptcy court with jurisdiction over you or your business. The current filing fee is $1,167, with an additional administrative fee of $571.
With the petition, you’ll file:
- Schedules of your assets and liabilities
- A schedule of your current income and expenditures
- A schedule of executory contracts and unexpired leases
- A statement of financial affairs
If you’re filing as an individual or married couple, there are other requirements, including a certificate for completing a credit counseling course.
After filing, you become the “debtor in possession” because you keep control of the company as it goes through the reorganization process. You’ll remain as “debtor in possession” until the court:
- Confirms your reorganization plan
- Dismisses your case
- Converts it to a Chapter 7
- Appoints a Chapter 11 trustee
The court only appoints a trustee to handle the business in rare cases.
Disclosure Statements and Reorganization Plan
Usually, you’ll file a written disclosure statement and your plan for reorganization with the court. All of this is information that allows your creditors and court to decide if your goal is reasonable.
You have 120 days during which you retain the right to file a reorganization plan, and no one else can. In your proposal, you must show how you’d treat each class of creditors. Then, any creditors that wouldn’t get paid in full get to vote on your plan.
It’s important to know that there’s no distinction between your business and personal assets and income if you’re a sole proprietor. You may have to use personal assets to pay creditors.
Section 341 Meeting
The U.S. trustee supervises your bankruptcy process and holds a meeting of your creditors, called a section 341 meeting. The trustee and your creditors may question you under oath at this meeting, which is why it’s crucial to work with a Chapter 11 bankruptcy lawyer to prepare.
The U.S. trustee appoints unsecured creditors with the largest claims to the creditors’ committee during your case. This committee might investigate your conduct and the business operations and help create your reorganization plan.
Case Trustee or Examiner
While the U.S. trustee oversees the bankruptcy process, a case trustee or examiner might be appointed. This is rare and usually happens in situations involving:
- Gross mismanagement
Creditors also can ask for a case trustee to protect their interests.
Suppose the U.S. trustee appoints a case trustee during your bankruptcy. In that case, this trustee will manage the property and operate your business. They may come up with a reorganization plan or work on a plan with the creditors.
An examiner is different than a case trustee. If the U.S. trustee appoints an examiner, this person investigates your conduct and business operations and files a statement with the court. However, an examiner can also perform some of the same functions as a trustee.
Your creditors can’t pursue their claims against you once you file the bankruptcy petition. An automatic stay suspends all judgments, collections, foreclosures, and prepossessions. However, during Chapter 11, the stay doesn’t stop all actions against you or your business.
Talk with a Chapter 11 lawyer about what you’ll still need to deal with even after you file.
A debtor in possession or trustee has “avoiding” powers, which means you can undo transfers of money or property that took place in a certain period before filing for bankruptcy. Generally, you can undo transfers within 90 days of filing the petition.
Finally, after many steps and discussion, the court reviews the proposed plan and votes to decide whether to confirm the plan at a court hearing.
Completing the Reorganization Plan
Over several months or years, you must follow the reorganization plan or go back to court to modify it. Once you’ve fulfilled all your responsibilities, the court will issue a final decree and close your bankruptcy case.
Get a Free Consultation on Chapter 11 Bankruptcy Today
To learn more, call our Cleveland, Ohio bankruptcy lawyers at Luftman, Heck & Associates, LLP. We’ll help you decide if bankruptcy is the right course of action, and if so, which chapter you should file, including Chapter 11.
Call (216) 586-6600 to schedule your free initial consultation.