Answers to Frequently Asked Questions (FAQs) about Chapter 11 Bankruptcy

Filing for Chapter 11 bankruptcy is a viable solution for many businesses that are struggling to pay their debts as they come due. Unlike filing for Chapter 7 bankruptcy, which typically results in liquidation, filing under Chapter 11 allows businesses to continue operating under a “reorganized” debt structure.

If you are considering a Chapter 11 bankruptcy filing for your business, there is a lot you need to know. Here are the answers to some frequently asked questions (FAQs) about Chapter 11 eligibility and the Chapter 11 bankruptcy process:

When is a Business Eligible to File for Bankruptcy Under Chapter 11?

Nearly all businesses are eligible to file for bankruptcy under Chapter 11. The only exclusions apply to banks, insurance companies, and certain investment entities.

While many people assume that bankruptcy is only an option for insolvent businesses, this is not the case. Solvent businesses can (and frequently do) file under Chapter 11. As long as a business files in good faith with the intent to reorganize its debts so that it can make payments as they come due, the business can utilize the Chapter 11 bankruptcy process to maintain its viability as a going concern.

Are There Business Income Requirements or Restrictions Under Chapter 11?

No, Chapter 11 does not impose any minimum or maximum income requirements for businesses. While Chapter 7 has a “means test” for individual debtors, there is no comparable test under Chapter 11. However, when filing under Chapter 11, businesses must be capable of repaying their reorganized debts over time. If a business’s income will be insufficient to sustain even a reduced monthly debt load, then filing under Chapter 11 may not be a suitable option.

What is Involved in Filing for Bankruptcy Under Chapter 11?

Businesses can initiate the Chapter 11 bankruptcy process by filing a voluntary petition in the appropriate court. Along with the voluntary petition, businesses must also submit the filing fee and administrative fee, as well as various schedules, statements and exhibits. While preparing a comprehensive Chapter 11 bankruptcy filing can be a time-consuming process, putting in the necessary effort up front can help streamline the overall process and avoid unnecessary issues at later stages.

What Happens When a Business Files for a Chapter 11 Bankruptcy?

There are several steps in the Chapter 11 bankruptcy process. Once a business makes its initial filing, the bankruptcy court will schedule a hearing within a few days to address various preliminary matters. The U.S. trustee’s office will also conduct preliminary interviews and schedule a meeting of creditors.

As the process moves forward, the debtor, bankruptcy trustee and creditors will all have various obligations with attendant deadlines. One of the debtor’s most significant obligations post-filing is to submit a Chapter 11 plan—which it must do within 120 days of filing its voluntary petition. Ultimately, if all goes well, the process will conclude with the trustee making authorized distributions from the business’s bankruptcy estate and the business moving on with a reorganized (and much more manageable) debt structure.  

What is the “Automatic Stay” in a Chapter 11 Bankruptcy?

One of the most immediate benefits of filing for bankruptcy under Chapter 11 is the “automatic stay”. When a business files a voluntary petition under Chapter 11, this provides automatic and immediate relief from debt collection. While the Chapter 11 process is pending, the business’s creditors are prohibited from “dismembering” the business’s bankruptcy estate. Even if an individual creditor’s collection efforts would not frustrate the bankruptcy process independently, the automatic stay still applies to prevent piecemeal dismemberment.

The automatic stay applies to all commercial and civil judgment creditors. However, it does not prevent criminal prosecution or other governmental enforcement action.

What Does it Mean to “Reorganize” a Business’s Debts Under Chapter 11?

So far we’ve talked a lot about “reorganization,” but we haven’t explained what it means to reorganize a business’s debts under Chapter 11. In its simplest form, reorganization involves restructuring a business’s overall debt load so the business can repay its creditors over time. To ensure that all creditors get paid, the creditors may individually agree to reduce the business’s monthly payment obligations or accept other concessions. However, Chapter 11 reorganizations can also become quite complex, and they may involve reorganizing the business or the business’s operations to facilitate payment of the business’s debts as well.

While a Chapter 11 bankruptcy is not a liquidation proceeding, businesses can also pay off (or reduce) their debts through the distribution of assets in their bankruptcy estate. This process is generally managed by the bankruptcy trustee, subject to court approval.

Will I Retain Control of My Business After a Chapter 11 Bankruptcy Filing?

Yes, when you file for bankruptcy under Chapter 11, you will retain control of your business. While the bankruptcy trustee will be able to exert a certain amount of authority over assets in your company’s bankruptcy estate, you will retain authority over your company’s day-to-day operations and corporate-level decision-making. However, certain decisions that have significant financial implications may be subject to court approval.

The only major exception applies in the case of evident fraud or gross mismanagement. If the bankruptcy court concludes that you are responsible for defrauding any creditors or that the bankruptcy trustee must step in to prevent the waste of corporate assets, then you may not be able to remain in control. If you have concerns about either of these issues, you should discuss this with your company’s bankruptcy counsel during your initial consultation.

Schedule a Free Initial Chapter 11 Bankruptcy Consultation Today

While these FAQs are intended to be helpful, they just scratch the surface of what you need to know as a business owner contemplating a Chapter 11 bankruptcy filing. If your business is struggling financially, we strongly encourage you to schedule a free consultation at Edelboim Lieberman so that we can help you make informed decisions. To speak with an experienced Florida business bankruptcy lawyer in confidence, call us at 305-768-9909 or tell us how we can reach you online today.