Chapter 11 bankruptcy provides a mechanism for businesses (and high-debt individuals) to manage their debt. This can be done through a process called reorganization or by simply liquidating an entity or individual’s assets in chapter 7. A reorganization under chapter 11 involves classifying a business’s creditors into different classes and proposing a plan of reorganization that outlines new terms of repayment to those creditors. Sometimes a class of creditors will receive 100% of what they are owed. Sometimes a class of creditors will receive nothing. The method of determining how much a particular class of creditors receives is a function of established bankruptcy law, agreement between parties, and a judge’s independent analysis of what constitutes fair and equitable treatment.
In most cases, a debtor’s biggest trouble lies with the very classes of creditors that are hardest to restructure: secured lenders and taxing authorities. Simply put, secured lenders must either agree to a particular treatment or receive a treatment over their objection that reflects what the debtor could realistically obtain on the open market. Loans secured only by property that was purchased to be the debtor’s residence cannot be modified. Priority taxes, meanwhile, must be paid in full within sixty months (five years) of the filing of the bankruptcy case. These harsh realities are tempered slightly by the ability of a debtor to reduce the principle balance owed to a secured creditor down to the value of the collateral. Also, not all tax obligations are considered “priority” taxes. If a part of your obligation to the IRS or a state tax department is a penalty or if the tax debt represents unpaid income taxes for a return you filed more than three years ago, a debtor can often avoid paying all but a small percentage of that debt.
A chapter 11 debtor receives one of its greatest benefits simply by filing a case. When a bankruptcy case is filed, an automatic stay is put in place that shields the debtor from all collection activities of creditors – including foreclosures, law suits, tax levies, and garnishments. This automatic stay gives the debtor time to catch its breath and make a plan. Unfortunately, the automatic stay does not extend to protect a debtor’s owners or officers who may also be liable for a particular debt.
A chapter 11 case has the capacity to reduce the amount of unsecured, non-priority debt that a debtor is obligated to pay. Debts that fall into this category include credit cards, unsecured bank loans, breach of contract liability, broken lease liability, repossession or foreclosure deficiency balances, certain tax obligations, and the unsecured portions of formerly secured loans. The amount that a debtor is required to pay to this class is generally a function of the assets a debtor has and the amount of net income a debtor receives each month.
Oftentimes, the benefits to filing a chapter 11 case stop there: a debtor gets time and temporary protection, a chance to negotiate with its secured creditors, five years to pay back its priority tax obligations, and a chance to significantly diminish its unsecured, non-priority debt load.
The fees for a chapter 11 typically range from $10,000 to $25,000, depending on the complexity of the case. Fees for a business chapter 7 case typically range from $2,000 - $5,000. See our fee schedule.
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