What Types of Debts Are Eligible for Discharge in a Chapter 11 Bankruptcy?
While the primary purpose of a Chapter 11 bankruptcy is to reduce the business’ monthly debt load through a reorganized payment plan, businesses can use Chapter 11 filings to eliminate (or “discharge”) debts during the process as well. Discharging debts during the Chapter 11 bankruptcy process is fairly common, and when considering a reorganization, it is important to consider which debts your business might be better off eliminating entirely. An experienced Miami Chapter 11 bankruptcy lawyer can help you make informed and strategic decisions, and speaking with a lawyer is the first step in the process.
Discharge also occurs at the end of a Chapter 11 filer’s reorganization plan. If a business timely makes all of its payments on time, then any remaining outstanding liability will be discharged. But, this assumes that all of the business’ debts are dischargeable.
So, what types of debts are eligible for discharge in a Chapter 11 bankruptcy?
What Debts Are Eligible for Discharge Under Chapter 11?
Unlike consumer bankruptcy proceedings, there are few broad exceptions to dischargeability in business bankruptcy proceedings under Chapter 11. Instead, Chapter 11 starts with the proposition that business debts are generally dischargeable, and then it establishes exceptions to dischargeability that are largely circumstantial rather than being specific to certain types of debts. As a result, the following common types of business debts (among others) are all generally dischargeable under Chapter 11:
- Back rent under commercial leases
- Business credit card debt
- Business lines of credit
- Business loans
- Commercial loans
- Commercial or industrial real estate financing
- Commercial vehicle financing
- Credit extended by the business’ vendors and suppliers
- Equipment financing
- Other secured and unsecured business debts
In most cases, these categories will cover the substantial majority (if not all) of the debts that a business needs to reorganize and/or discharge in order to regain its financial footing. As a result, filing for bankruptcy under Chapter 11 is a viable solution for businesses in a wide range of scenarios, and it is well worth talking to a Miami Chapter 11 bankruptcy lawyer if you have concerns about your business’ financial stability.
What Debts Aren’t Eligible for Discharge Under Chapter 11?
While most types of business debts are generally eligible for discharge under Chapter 11, there are some exceptions. As we mentioned above, these exceptions are largely circumstantial—though certain types of debts (i.e., certain debts owed to the federal government) are not eligible for discharge under any circumstances. With this in mind, some examples of business debts that may not be eligible for discharge in a Chapter 11 bankruptcy include:
- Debts that the business fails to list on its Chapter 11 bankruptcy petition
- Debts owed for loans or other credit obtained through false pretenses
- Debts owed for loans or other credit obtained through fraud
- Debts owed for funds obtained by embezzlement or larceny
- Debts owed for “willful and malicious” injury to a third party or third-party property
Additionally, even if none of these dischargeability exceptions apply, creditors can still have defenses to discharge in some cases. For example, a creditor may be entitled to pursue full collection of its debt based on:
- A fraudulent conveyance
- Destruction of relevant records
- Falsification of relevant records
- Making false statements under oath during the Chapter 11 process
- Failure or refusal to comply with a court order during the Chapter 11 process
As you can see from these lists, exceptions to dischargeability and successful defenses to discharge in Chapter 11 bankruptcy proceedings are relatively rare. With that said, business owners should not simply assume that their business’ debts will be eligible for discharge. As we mentioned above, informed and strategic decision-making is essential, and, among other things, business owners will need to be careful to ensure that they do not conduct any transactions that may be classified as fraudulent conveyances when contemplating a potential bankruptcy filing.
Seeking Discharge of Business Debts Under Chapter 11 of the U.S. Bankruptcy Code: Informed and Strategic Decision-Making is Key
With all of this in mind, when does it make sense to seek discharge of a business’ debts under Chapter 11 of the U.S. Bankruptcy Code?
The short answer is, “It depends.” While filing for bankruptcy under Chapter 11 makes sense in a wide range of circumstances, business owners must ultimately decide if reorganizing their business’ debts is the best option they have available under the circumstances at hand. While filing under Chapter 11 is often a viable solution, businesses will often have other viable solutions available as well. This includes viable solutions that may be more cost-effective and have fewer long-term consequences than going through the federal bankruptcy process.
How can you make an informed decision? The key is to work with an experienced Miami Chapter 11 bankruptcy lawyer who will take the time to understand your business’ financial circumstances, thoroughly evaluate all of your options and help you decide how best to move forward. If filing under Chapter 11 makes sense, you will want to move forward promptly. If it doesn’t, you may need to promptly pursue other options as well in order to maximize their efficacy.
Many businesses carry a huge amount of debt, and while some can manage this debt effectively, others face unanticipated circumstances that impair their ability to make their payments as they come due. If you find yourself in this situation, the best thing you can do is talk to an experienced Miami Chapter 11 bankruptcy lawyer who can help you move forward as quickly and cost-effectively as possible.
Request a Complimentary Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman
Are you wondering whether filing for bankruptcy under Chapter 11 is a viable solution for your struggling business? If so, our lawyers can help you make informed and strategic decisions, and we invite you to get in touch. To speak with an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman in confidence, give us a call at 305-768-9909 or request a complimentary consultation online today.
