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Who Pays for Chapter 11 Bankruptcy?

8 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

Thousands of businesses and individuals across the country are thinking about filing Chapter 11 bankruptcy. According to the U.S. Bankruptcy Court, Chapter 11 bankruptcy filings are on the rise in the U.S., while all other bankruptcy filings are in decline. 

With so many individuals and small businesses filing Chapter 11 bankruptcy, you’re likely wondering, “Who pays for Chapter 11 bankruptcy?” The person or company filing Chapter 11 pays the costs including court fees and legal fees. Any discharged debts do not get paid. Those creditors must accept the financial loss. 

If you are considering Chapter 11 bankruptcy or another debt relief strategy, it may be in your best interest to consult with a bankruptcy attorney. 

What Does Chapter 11 Bankruptcy Mean? – Chapter 11 Bankruptcy Explained 

Chapter 11 is sometimes called a “reorganization” bankruptcy. Unlike Chapter 7 bankruptcy, Chapter 11 is designed to help businesses and individuals reorganize their debts. In doing so, they can keep their business and property (in most cases). 

That allows debtors to pay their creditors over time while still being a “debtor in possession” of their assets. Once all payments are made (according to the repayment schedule), the remainder of the debtor’s unsecured debt is discharged. 

Generally, businesses and individuals file Chapter 11 bankruptcy to get a fresh financial start, consolidate debt disputes, and sustainably pay back some of their debts, while keeping their business or financial life afloat. 

Chapter 11 typically focuses on restructuring certain types of debt, such as: 

  • Secured debt 
  • Unsecured debt
  • Priority tax debt 
  • Debts from leases or other types of contracts

During the Chapter 11 bankruptcy process, debtors must submit a debt repayment/ reorganization plan to their creditors. Creditors then vote to accept or reject the offer. In most cases, the creditor must accept a plan before the bankruptcy judge approves it. There are exceptions. 

Corporations and small businesses are more likely to file Chapter 11 than individuals. However, if your debt is greater than the amount allowed under chapter 13, and you don’t want to liquidate your assets with Chapter 7, then Chapter 11 could be an option worth considering. 

Learn more about the differences between Chapter 11 for businesses and Chapter 11 for individuals below. 

Chapter 11 for Businesses 

Large and small businesses typically use Chapter 11 reorganization. The goal is to do everything possible to keep their business running while debt obligations are sorted out. If reorganization efforts fail, companies filing Chapter 11 may have to liquidate their assets and close down the business. 

Corporations that file Chapter 11 usually experience a change in ownership and debt structure. Many well-known corporations including Delta Airlines, Washington Mutual, and General Motors have come out of their Chapter 11 bankruptcy stronger. However, for every successful Chapter 11 business case, countless companies fold during the process. 

Chapter 11 for Individuals

Businesses file Chapter 11 bankruptcy more than individuals. However, in some cases, Chapter 11 is the best option for individuals as well. That’s usually the case for:

  • Real estate investors who need to rewrite mortgages
  • Individuals who hold more unsecured debt than Chapter 13 allows ($360,475)

Chapter 11 makes it possible for individuals to reorganize substantial amounts of unsecured debt. Like Chapter 13, a Chapter 11 filing allows individuals to repay certain debts and potentially receive a discharge from others. 

How Much Does it Cost to File a Chapter 11 Bankruptcy?

The fee for Chapter 11 bankruptcy filings is $1,738. In comparison, the fees for Chapter 7 and Chapter 13 are significantly lower. In addition to court costs, those filing for Chapter 11 are likely to pay much more. 

Attorneys, advisors, accountants, and consultants typically play a major role in Chapter 11 filings. Some experts estimate that a Chapter 11 bankruptcy can cost as much as 1-5% of the value of the debtor’s assets. 

Chapter 11 Bankruptcy vs. Chapter 7

Chapter 7 bankruptcy is a “liquidation” bankruptcy. That means that debtors who file must agree to have non-exempt assets sold off to pay off their outstanding debts. To file Chapter 7, you must pass a “means test.” 

If your income is below the median for your state, you automatically qualify for Chapter 7. However, if your income is above the median level, you must pass the second part of the means test. That determines whether you have enough income to pay your debts or not. 

Once debtors receive a discharge in Chapter 7, the secured debt included in the bankruptcy is erased. Chapter 7 helps those with credit card debt, medical bills, and private loans. However, it does not address many other types of debt. 

How to File Chapter 11

The Chapter 11 bankruptcy code is complex. However, the procedure to file is not that difficult. Listed below is a general overview of the Chapter 11 bankruptcy process. 

  1. File a Chapter 11 Petition 
  2. Prepare your financial statements and reports
  3. Attend the initial debtor interview 
  4. Attend the 341 meeting of creditors
  5. File a disclosure statement with a plan of reorganization
  6. Attend a disclosure hearing 
  7. Attend the confirmation hearing (when the plan is approved)
  8. Adhere to the payment plan and receive your debt discharge

Once all payments are made, the remainder of your unsecured debt is discharged. It’s never recommended to file a bankruptcy without a bankruptcy attorney. That’s especially true of Chapter 11 cases. Consult with an experienced bankruptcy lawyer before making a final decision. 

Frequently Asked Chapter 11 Questions 

Due to the complexity of Chapter 11 bankruptcy, most people have questions about the process. Listed below are a few of the most common Chapter 11 bankruptcy questions. 

Is a Chapter 11 Bankruptcy Bad? 

Chapter 11 is neither “bad” nor “good.” It is a financial tool used by corporations, small businesses, and individuals to restructure their debts. Unfortunately, many debtors are unable to complete the Chapter 11 repayment program. That can lead to liquidation and business closure. 

Regardless of the chapter filed, it’s essential to understand the implications of doing so. In some cases, a debt-relief alternative may benefit you more than filing for bankruptcy. A few examples include debt consolidation, credit counseling, and negotiating with creditors. 

Where Can I Find Chapter 11 Bankruptcy Forms? 

All bankruptcies are filed with a federal bankruptcy court. The bankruptcy court you choose should be close to where you live, operate your business, or hold significant assets during the six months before filing. Otherwise, your case could be dismissed or delayed. 

You can find forms for Chapter 11 bankruptcy on the U.S. Courts website. It’s also possible to get forms at the clerk’s office at the bankruptcy court closest to you. 

Who Gets Paid First in Chapter 11?

The Chapter 11 bankruptcy code establishes priority levels for certain types of debt. Usually, secured creditors, like financial institutions, are paid first. 

Unsecured creditors (i.e., suppliers, credit cards, private loans, etc.) are paid second. If there are stockholders involved, they are usually the last to be paid. It’s important to note that not all debts are paid. Some creditors will have to absorb all of the debt. 

How Does a Chapter 11 Trustee Get Paid? 

Chapter 11 bankruptcy trustees are paid via a quarterly trustee fee. That fee is based on the disbursement amounts and the value of the estate. It’s not to exceed $250,000 in any quarter. Fees are based on a sliding scale. The more valuable the estate, the higher the fee. 

How Often Can You File Chapter 11 Bankruptcy?

You can file bankruptcy as many times as you need to. Depending on the chapter, you may have to wait a certain amount of time before filing again. Chapter 11 typically takes so long to complete, debtors are not as likely to re-file this chapter that often. 

Can Chapter 11 Save my Home? 

Chapter 11 is designed to help debtors keep their property while they reorganize debt and stabilize their business affairs. In some cases, debtors can lose their property. Consulting with an experienced bankruptcy attorney helps alleviate the stress of not knowing what will happen to your property. 

In most cases, those filing Chapter 11 have already decoupled their business assets from their personal assets. However, in the case of individuals, that’s not always possible. 

Are Chapter 11 Filings Public? 

Typically, yes. All bankruptcy filings are public knowledge. That means that anyone can look up information related to your case. Additionally, since Chapter 11 bankruptcies are public knowledge, it could negatively affect your credit score. In rare cases, Chapter 11 filings can be sealed from public view. 

Can a Company Survive Chapter 11? 

Absolutely yes. Thousands of individuals and companies successfully file Chapter 11 and receive a discharge. However, getting through bankruptcy is not easy. Many are unable to complete strict repayment plans. That can lead to their case being dismissed, liquidated, closed, etc. 

Do I Need a Bankruptcy Lawyer?

You can file bankruptcy without the help of a bankruptcy lawyer. Most people are not comfortable taking that risk, however. If you’re filing Chapter 7 and have very few assets, then filing without a lawyer may be feasible but it is still not recommended. 

Due to the complicated nature of Chapter 11, it typically requires the skill and experience of a bankruptcy attorney. Otherwise, mistakes, delays, and misunderstandings are likely to occur. 

Filing for bankruptcy can be expensive. That’s true whether you file Chapter 7, Chapter 13, or Chapter 11. Unfortunately, most bankruptcy lawyers won’t even begin working on your case until they receive payment in full. Depending on how soon you need relief, that could be a problem. 

With Unbundled Legal Help, our bankruptcy attorneys offer affordable pay-as-you-go payment plans so they can get started on your case right away. Our attorneys also provide convenient video consultations. That way, you can get quickly started on your bankruptcy case from the comfort of home. 

Click here to receive a free consultation with an Unbundled Legal Help bankruptcy lawyer in your area today.

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