In a Nutshell

Chapter 11 bankruptcy cases are mostly utilized by businesses - think Skymall or General Motors - or folks with significant assets and debts. The typical consumer is not a Chapter 11 filer.

Written by Attorney Jenni Klock Morel.  
Updated August 4, 2020


There are three chapters of bankruptcy that individuals (and married couples) can file. The most well known chapters are Chapter 7 and Chapter 13. Chapter 11 bankruptcy cases are mostly utilized by businesses - think Skymall or General Motors - or folks with significant assets and debts. The typical consumer is not a typical Chapter 11 filer, especially because both the filing fees and attorney fees are significantly higher. But, knowledge is power, so let’s take a closer look at Chapter 11 bankruptcy. 

How does a Chapter 11 bankruptcy work? 

A Chapter 11 bankruptcy starts the same way as all other types of bankruptcy. A petition is filed with the court, a case number assigned, the automatic stay takes effect, and a meeting of creditors scheduled. That is just about it as far are real similarities between Chapter 11 and the other types of bankruptcy are concerned. Depending on the filer’s situation, a Chapter 11 can work either as a reorganization, similar to a Chapter 13, or a liquidation, similar to a Chapter 7. 

As a reorganization

Chapter 11 can function as a reorganization where the filer, who is unable to pay their debts as they come due, is given the opportunity to reorganize their financial affairs. This is done through a plan of reorganization. 

The plan of reorganization

A Chapter 11 bankruptcy reorganization plan lays out how the filer will pay their debt obligations moving forward. It gives the filer the chance to restructure and renegotiate the terms of paying back creditors. 

The U.S. Bankruptcy Code requires that creditors be broken up into classes. Generally, the classes of creditors are:

  • Secured creditors whose debts are secured by a lien against property.

  • Unsecured priority claims, which are unsecured debts that are given priority to receive money from the repayment plan.

  • Non-priority unsecured claims that are paid only after all priority debts are satisfied. 

  • And, if the filer is a business, not an individual, equity security holders, which are stockholders or partners of a company in Chapter 11 bankruptcy. 

Which creditors get paid, in what order, and when will be included in the contents of the plan of reorganization. Generally, secured creditors and unsecured priority claims will be paid first. Non-priority unsecured creditors, who sometimes form a creditors’ committee, will be paid after other creditors or in some cases not paid at all. Equity security holders have a claim on the company and may be paid before or after other creditors, or not paid at all. Creditors can object to their assigned class of creditors and to the plan proposed by the filer. 

Only the Chapter 11 bankruptcy filer is allowed to file a reorganization plan in the first 120 days after the case is filed with the United States bankruptcy court. When the filer is a small business debtor, that time frame increases to 180 days after filing their Chapter 11 bankruptcy petition. Thereafter, a creditor may file a reorganization plan if the debtor in possession (the Chapter 11 bankruptcy filer that keeps possession and control of its assets during reorganization) hasn't filed a plan or hasn't filed a plan that's been accepted by the creditors. 

The reorganization plan has to be accompanied by a written disclosure statement. The disclosure statement is required to provide adequate information about the filer's business affairs so that the creditors can make an informed judgment about the plan of reorganization.  In a small business case, the bankruptcy court may decide that the plan itself provides adequate information and that a separate disclosure statement isn't necessary. 

Creditors will file proof of claims, which state how much money they're owed and protects their rights in a bankruptcy case. If an objection to their claim is filed, the creditor will have to prove why their claim is valid. The bankruptcy court ultimately decides the validity of claims. 

Creditors with valid claims get to vote on whether they accept a proposed Chapter 11 bankruptcy reorganization plan. The creditors' vote and court approval are necessary for plan confirmation. Court approval requires that at least one class of impaired claims – creditors with claims that will not be paid in full  – vote in favor of the bankruptcy plan. Under the Bankruptcy Code, an entire class of claims has accepted a plan if it's accepted by creditors that hold at least two-thirds the total amount of all claims in the class and more than one-half of the number of allowed claims in the class.  

Plan confirmation

A confirmation hearing will be held so that the court can determine whether to confirm (approve) the plan. The court will confirm a plan that complies with bankruptcy laws, was proposed in good faith, has reasonable costs and expenses, and meets all other requirements. Once the reorganization plan is confirmed, the Chapter 11 bankruptcy case can actually be closed until the plan is completed, then reopened. This allows the filer to save on fees and to stop having to file monthly reports.

There's no bankruptcy trustee appointed in most Chapter 11 cases. Instead, the filer performs the duties that an appointed bankruptcy trustee would do in Chapter 7 or Chapter 13 bankruptcy proceedings. Acting as debtor in possession, the individual debtor or the filer's owner in cases of corporate bankruptcy maintains control over their financial affairs or business operations and serves as representative of the bankruptcy estate. They're responsible for examining and objecting to claims, accounting, filing tax returns, complying with reporting requirements, and other duties. The U.S. Trustee handles the administrative side of the Chapter 11 bankruptcy filing and makes sure the debtor in possession does what they're supposed to do. 

A bankruptcy trustee can be appointed if the Chapter 11 bankruptcy filer doesn't want to act as debtor in possession. The bankruptcy court can also appoint a trustee to take over operations from a debtor in possession if the court has a good reason, like fraud or incompetence on the part of the filer.

As a liquidation

A liquidating plan is possible in Chapter 11 bankruptcy. Such a plan would shut down the filer's operations and sell all remaining assets for the benefit of the creditors to pay back at least a portion of the debts owed. Liquidation under Chapter 11 can be better than under Chapter 7 liquidation because the debtor in possession and the creditors have more say over how the Chapter 11 plan will work.

Just as it is under a Chapter 11 case that operates as a reorganization, a bankruptcy trustee may or may not be appointed in a Chapter 11 that works as a liquidation. 

How is a Chapter 11 different from a Chapter 13?

Chapter 11 bankruptcy can be filed by individuals, married couples, corporations, partnerships, and other types of business entities. Chapter 13 bankruptcy can only be filed by individuals and married couples. Chapter 13 is designed for people who need bankruptcy protection, not businesses. 

Under the Bankruptcy Code, Chapter 13 is an adjustment of debts of an individual with regular income. Chapter 13 bankruptcy requires a filer to have regular income to be able to make a monthly plan payment. On the other hand, Chapter 11 bankruptcy allows for a plan of reorganization or liquidation, and it isn't always necessary for a Chapter 11 filer to have regular income.

Further, the Chapter 13 process is much more streamlined. The Bankruptcy Code requires a Chapter 13 plan to last 3 to 5 years depending on the filer's income. A Chapter 11 bankruptcy is less structured and may last a shorter or longer time than a Chapter 13. Further, the contents of a Chapter 13 plan can be a lot less detailed than the contents required in a Chapter 11 plan. Also, Chapter 13 does not require the in-depth disclosure statement required in a Chapter 11 bankruptcy case. 

The Bankruptcy Code requires that the Chapter 13 filer be the one to file the repayment plan. The same requirement is not part of the Chapter 11 Bankruptcy Code. In Chapter 11, a creditor can file a plan after the time during which the filer has an exclusive right to do so expires. This is true if the bankruptcy filer doesn't file a plan or hasn't filed one the creditors will approve. 

Creditors in Chapter 13 bankruptcies don't get a vote the way they do in Chapter 11 bankruptcies. A Chapter 13 creditor can object to confirmation of the plan, but the court can approve the plan as long as some of the filer's disposable income will make payments to unsecured creditors. 

Another way Chapter 11 is different from Chapter 13 is that a standing trustee administers all Chapter 13 cases. The Bankruptcy Code requires that a trustee be appointed to the case.  Chapter 11 has no such requirement and allows the filer to act as debtor in possession, essentially filling the role of the trustee. 

Finally, there are no debt limits in Chapter 11 as there are in Chapter 13. As of April 1, 2019, the Chapter 13 debt limits are $419,275 in unsecured debt and $1,257,850 in secured debt. A filer's debt load must be below the debt limits to qualify for Chapter 13 bankruptcy. 

How is a Chapter 11 different from a Chapter 7?

The bankruptcy process can either be for reorganization or liquidation. 

Chapter 11 of the Bankruptcy Code is primarily for reorganization. This is when a filer restructures their debt obligations. A business attempting a reorganization through Chapter 11 bankruptcy would stay in business and retain control of their operations while renegotiating debt repayments with creditors. 

Chapter 7 of the Bankruptcy Code is for liquidation. This is when the appointed trustee takes and sells the filer's nonexempt assets – assets that aren't protected by an exemption – for the benefit of the creditors. A business liquidating under Chapter 7 will go out of business and won't exist after the case is done. 

Chapter 7 is the most common form of bankruptcy in the United States. Both Chapter 7 bankruptcy and Chapter 11 bankruptcy allow for the process of asset liquidation. However, the process of liquidation is different under each chapter. 

  • Chapter 7 liquidation is handled by a panel trustee and carried out pursuant to the Bankruptcy Code, not a separate plan filed as part of the bankruptcy. 

  • Chapter 11 liquidation can be handled by the debtor in possession or a trustee and will be carried out in accordance with the liquidating plan filed as part of the bankruptcy. 

The benefit to liquidating under Chapter 11 instead of Chapter 7 is that the filer can retain control over operations during liquidation and the filer and creditors have more freedom to choose the most advantageous ways to liquidate. Though there are drawbacks, including a significantly higher filing fee, burdensome reporting requirements, and hurdles on the path to plan confirmation. 

Conclusion

The majority of people file for personal bankruptcy protection under Chapter 7 bankruptcy or Chapter 13 bankruptcy. It's rare for an individual or married couple to file Chapter 11 bankruptcy. In reality, Chapter 11 is not for the typical consumer. Most often, Chapter 11 cases are filed by businesses looking to restructure debts or liquidate assets and property. 

Learning about your debt relief options is a good place to start if you're unable to pay your debts as they become due. Consider meeting a bankruptcy attorney for a free consultation and take our bankruptcy screener to see if you’re a fit for Upsolve's free web app.



About the author
Attorney Jenni Klock Morel

Jenni Klock Morel is a writer, nonprofit leader, and Social Justice Law Scholar. For years she practiced consumer bankruptcy law exclusively as a debtor's attorney, helping individuals and families file for Chapter 7 or 13 bankruptcy protection. Jenni left the practice of law to... read more

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