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CHAPTER 11 BANKRUPTCY-- A BRIEF OVERVIEW

Posted by attorney Patricia Williams

Chapter 11 bankruptcy is primarily for reorganizing the financial affairs of companies, to enable a business to continue to operate and hopefully become profitable when it finds that its debts are more than its income. It can be used for large and small corporations, partnerships, and LLCs. Chapter 11 can also be used by some individuals. If a person owes more than $360,475 in unsecured debt (such as credit cards), or more than $1,081,400 in secured debt (such as mortgages), they do not qualify for Chapter 13 bankruptcy, and must file Chapter 11 if they want bankruptcy protection from the courts.

Chapter 11 is much more complicated and expensive than Chapter 7 or Chapter 13. Just the filing fees alone to start a new Chapter 11 proceeding is$1,213; and a typical cost for legal fees might easily be $10,000 or $20,000 the first year alone. There are a lot of reports required for taxes, insurance, operations, and bank accounts. On the other hand, you must file a reorganization plan within 120 days of filing, whereas you only have 15 days to do so when filing a Chapter 13. And the plan need not be limited to a maximum of five years, as in a Chapter 13, if bankruptcy protection is needed for a longer time period. With Chapter 11 you can get out of any leases for offices or equipment you do not really need, and you can force secured creditors (such as mortgage holders of an office building or factory you are buying, or loans with which you bought vehicles your business needs) to re-write the loans down to the actual cash value of the items being paid for, possibly with other improvements in the terms.

Chapter 11 cases opened for small corporations or individuals fail very often. In fact, it is the opinion of many good attorneys that most small-business or personal Chapter 11 cases fail. Often the corporation or individual is not able to keep the company running without further losses, and so when the reorganization plan fails, the Court either dismisses the case or forcibly converts it to a Chapter 7 case. The key to avoiding failure is careful planning before filing. The cases most likely to fail are the ones filed on an emergency basis, with inadequate accounting or planning as to the company’s true prospects for success.

The main purpose of Chapter 11 is to allow time to reorganize the business to make it successful (or, in the alternative, to allow for orderly, fair liquidation). If the business is not making money now, why not? Is there any evidence or reason this is likely to change? Will layoffs or trimming excess expenses enable the core business to succeed? Was the difficulty due to embezzlement or mismanagement by an employee or manager who is now gone from the company? If filing Chapter 11 will allow time and means to make the business profitable in the future, and stop losing money, then the Chapter 11 can succeed. Filing just to stall creditors may only delay inevitable business failure. People should not rush into a Chapter 11 on an emergency basis, without careful planning; that may only be a waste of time and a lot of money. First make sure you have accurate, complete accounting, and up-to-date tax returns so you and your CPA and a good bankruptcy lawyer can determine the true position of your company and the advisability of filing Chapter 11.

Sometimes a smaller corporation has the choice of filing under either Chapter 7 or Chapter 11; or an individual may have the choice of filing under Chapter 7, Chapter 11, or Chapter 13. When such an option occurs, occasionally certain law firms like to steer their clients towards Chapter 11when a much cheaper Chapter 13 or Chapter 7 would have been much more logical, because under Chapter 11, the law firm stands to make tremendously higher fees-- perhaps from four to thirty times as much! For a small company, just the legal fees alone can contribute to failure in a Chapter 11. Such firms sometimes advise their clients to file under Chapter 11 knowing that it is unlikely to succeed, and that the case will likely be dismissed or converted to a Chapter 7 by the court, after the law firm has made a lot of money from the client.

Fortunately, most law firms would not do such a thing, but sometimes, this word to the wise may save you a lot of unnecessary expense and trouble. And a law firm is likely giving you good advice to file Chapter 11 if you are an individual over the debt limits for a Chapter 13, or if it is a case where Chapter 11 is the only way possible to keep a business going which has a good chance of success. Situations vary; be sure to see a qualified attorney for advice in your particular case.

Entire article ©2012 The Williams Law Office LLC

Additional resources provided by the author

Also see my other Legal Guides: CHAPTER 7 BANKRUPTCY-- A BRIEF OVERVIEW; CHAPTER 13 BANKRUPTCY-- A BRIEF OVERVIEW; THREE LESS COMMON TYPES OF BANKRUPTCY: CHAPTER 9, CHAPTER 12, AND CHAPTER 15; and SO-CALLED "CHAPTER 20" BANKRUPTCY

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