How Chapter 11 bankruptcy works

On Behalf of | Jun 25, 2021 | Chapter 11 Bankruptcy |

Most debtors in North Carolina file for Chapter 7 or Chapter 13 bankruptcy when they need debt relief. Chapter 7 erases unsecured debts by selling assets through a trustee while Chapter 13 allows debtors to pay creditors over time and keep property. However, Chapter 11 provides debt relief debtors who don’t meet the requirements for Chapter 7 or 13.

Overview of Chapter 11

Chapter 11 reorganization resembles Chapter 13 bankruptcy because it allows debt relief through a payment plan. The debtor files a petition voluntarily or at the request of creditors to start the process. The debtor cannot file a petition if they have received a discharge within 180 days of the current petition.

Partnerships, corporations and sole proprietorships commonly file Chapter 11 if their debts exceed Chapter 13 limits. The debtor must prove to the court that they have the means to make payments. The debtor proposes a plan to the court for approval to repay debts, but it must treat all creditors equally.

Benefits of Chapter 11

Chapter 11 allows a business to remain open and keep assets, making it a debtor in possession as long as there is no fraud. The owners remain in control of the business, but the court still has to make some decisions. The debtor gets the benefit of DIP financing to apply for loans if they have good credit.

Filing for Chapter 11 can get costly for a small business, but Subchapter 5 simplifies the process. Congress passed Subprime Chapter 5 under the Small Business Reorganization Act of 2019. Small business owners filing Chapter 11 must have debts derived from business activity and not insiders.

All types of bankruptcy enact the automatic stay, which prevents creditors from seeking payments temporarily. This includes bank levies, foreclosures, evictions, property seizures, collections trials and till taps.

Chapter 11 bankruptcy benefits businesses, but unlike other types, owners can’t file pro se. The law requires them to file bankruptcy using an attorney.