Chapter 11 Bankruptcy: Business Reorganization

Chapter 11 bankruptcy is often called "reorganization bankruptcy." Unlike Chapter 7 (which liquidates the business), Chapter 11 allows you to continue operating while restructuring debts under court protection.

It's the tool that major corporations use when they hit financial trouble—and it's available to small businesses too. But it's complex, expensive, and not right for everyone.

What Is Chapter 11 Bankruptcy?

Chapter 11 provides:

• Automatic stay: Stops all collections, lawsuits, foreclosures immediately upon filing
• Time to reorganize: Typically 3-5 years to pay restructured debts
• Debt restructuring power: Court can force creditors to accept reduced/modified terms
• Business continues: You remain in control (debtor in possession)
• Cramdown ability: Reduce secured debt to collateral value

Chapter 11 Process Timeline

Who Should Consider Chapter 11?

Good Candidates:

• Viable business: Has potential to be profitable with restructured debt
• Significant debt: $200,000+ (minimum for it to be cost-effective)
• Multiple creditors: Complex debt situation needing court-ordered solution
• Foreclosure imminent: Need automatic stay to stop property loss
• Secured debt problems: Underwater on assets, need cramdown
• Revenue exists: Enough income to fund reorganization plan

Poor Candidates:

• No revenue: Can't fund any plan payments
• Small debt amounts: Under $100K (cheaper alternatives exist)
• Business not viable: Fundamental problems that restructuring won't solve
• Can't afford attorney fees: $15,000-50,000+ upfront

Costs of Chapter 11

Attorney Fees: $15,000-$50,000+ (small business) or $100,000+ (complex cases)

Filing Fee: $1,738 (paid to court)

Other Costs:

• Accountant fees (financial reporting): $2,000-10,000
• Trustee fees (if appointed): Percentage of disbursements
• Business valuation: $2,000-5,000
• Court costs and administrative expenses

Total Cost Range: $25,000-$75,000 for small business Chapter 11

The Cramdown: Most Powerful Tool

Chapter 11's most valuable feature is the ability to "cram down" secured debt to the current value of collateral.

Example:

• Owe $500,000 on commercial property
• Property currently worth $300,000
• Chapter 11 cramdown: Secured debt reduced to $300,000
• Remaining $200,000 becomes unsecured (paid at pennies on the dollar in plan)
• Result: Save $150,000+

Types of Chapter 11 Claims

Debtor in Possession (DIP)

In Chapter 11, you typically remain "debtor in possession"—you continue running your business. This means:

• You keep control (no trustee takes over)
• Continue daily operations
• Make business decisions
• Pay employees, vendors (with court approval for major decisions)
• Must file monthly operating reports with court

DIP Financing: Can borrow money during Chapter 11 with court approval (super-priority status)

Operating Under Chapter 11

What You Can Do:

• Continue normal business operations
• Pay ongoing expenses (rent, utilities, inventory)
• Pay employees
• Enter into ordinary course contracts

What Requires Court Approval:

• Selling assets outside ordinary business
• Borrowing money
• Large contracts or leases
• Paying pre-petition debts
• Professional fees over certain amounts

The Reorganization Plan

The plan must show:

• Classification of claims: Group similar creditors
• Treatment of each class: How much they'll be paid, when
• Means of execution: Where money comes from (operations, asset sales, new financing)
• Feasibility: Realistic projections showing you can make payments

Creditor Acceptance Requirements:

• At least one impaired class must accept (majority in number AND 2/3 in dollar amount)
• Court can confirm over objections if plan is "fair and equitable"

Small Business Chapter 11

If you qualify as "small business debtor" (under $2.7M in debt, excluding real estate debt):

• Faster timeline: Plan due within 90 days
• No creditors' committee: Reduces costs
• Streamlined process: Less complex procedures
• Lower costs: Still $15,000-30,000 in attorney fees

Subchapter V (Small Business Reorganization)

New option as of 2020 for businesses under $7.5M in debt:

• No creditor vote required: Court approves if plan is feasible
• Trustee appointed: But you keep control of business
• 3-5 year plans: More flexible than traditional Chapter 11
• Can include personal debt: For owner-operators
• Lower costs: $10,000-25,000 in many cases

Best For: Small businesses with under $7.5M debt needing simpler, cheaper Chapter 11

Alternatives to Chapter 11

• Out-of-court workout: Negotiate directly with creditors (cheaper, faster)
• Debt Restructuring - Modify terms without court
• Debt Settlement - Pay lump sum for less than owed
• Chapter 7 - Liquidation if business not viable
• State law assignments for benefit of creditors (ABC) - Alternative liquidation

Risks of Chapter 11

• Cost: $25,000-75,000+ with no guarantee of success
• Conversion to Chapter 7: If plan fails, court may convert to liquidation
• Public record: All financial details become public
• Customer/vendor concerns: May lose business due to bankruptcy stigma
• Time consuming: Owner spends significant time on bankruptcy process
• No discharge without plan completion: Must complete 3-5 year plan to get discharge

Frequently Asked Questions

Get Professional Help

Chapter 11 requires experienced bankruptcy attorney. Do not attempt without legal counsel.

What to look for in attorney:

• Specializes in business bankruptcy (not consumer)
• Has filed multiple Chapter 11 cases
• Familiar with your local bankruptcy court
• Clear fee structure and payment plan
• Good reputation with local bankruptcy trustees