Chapter 11 is not a type a bankruptcy case we hear of very often. But when we do hear about it, it is usually in the news and it has something to do with a big corporation turning to the courts when it is having financial issues.

What is Chapter 11 Bankruptcy?

Many of us do not know that Chapter 11 is the only type of bankruptcy available for small businesses that are owned by limited liability companies, partnerships, or corporations. Chapter 11 allows a small business to restructure its finances by implementing a reorganization plan that is approved by the bankruptcy court. Rather than completely abolish the business, Chapter 11 helps to reorganize debts by modifying payment plans and help the business stay in operation. If necessary, a debtor will have to sell some of his assets to be able to pay off any claims.

How is Chapter 11 different from the other types of bankruptcy?

Chapter 11 is different from Chapter 7 because a small business owner that files for Chapter 7 does not have the means to keep his business afloat, whereas the idea of Chapter 11 is to keep the business in operation.

Chapter 11 also differs from Chapter 13 because only individuals are allowed to file for Chapter 13, not small businesses. Chapter 13 also requires that you meet certain debt limits in order to be eligible. If you owe more than $383,175 in unsecured debt or $1,149,525 in secured debt, you cannot file for Chapter 13.

How it Chapter 11 Bankruptcy Works

First either the debtor or creditors will file a petition for Chapter 11 bankruptcy with the U.S. Bankruptcy Court. At this point, no other creditors may pursue the debtor for unpaid existing debts. The debtor will just go about his business and under the supervision of the bankruptcy court, determine how to pay his debts through a newly structured repayment plan. Priority creditors such as state and federal tax agencies or stock interests will be paid first.

Small Business Requirements

The U.S. Bankruptcy Code defines a “small business debtor” as an individual who engages in business activities with a total debt of $2.19 million or less at the time of filing.

If you meet this small business requirement, you must also have available at filing a statement of operations, a copy of your most recent federal income tax return, your cash flow statement, and your most recent balance sheet.

Remember, Chapter 11 bankruptcy is probably the most expensive in legal fees and can be extremely costly for a small business that is underwater. It may be best to speak with a qualified Bankruptcy Attorney who can help you decide what your best options are.