When Should You Consider Chapter 11? These Are Five of the Most Common Scenarios:
1. Equity at Risk in Foreclosure
Is a creditor threatening to foreclose on property? Does that property have equity? Chapter 11 can be the most valuable in such instances. Upon the filing of a Chapter 11 bankruptcy case, all foreclosure sales are halted. This immediately gives you breathing room. In a chapter 11, you then have option to: a) sell the property, b) cure the arrears, or c) (possibly) restructure the debt. But if there is substantial equity and a foreclosure sale is approaching, you need to take action, asap. Waiting too long will put your back against the wall.
2. Valuable Business, But Cash Crunch
Is your business is viable, but dealing with a short-term cash crunch? Chapter 11 might be a solution. This is particularly true if creditors stand to receive more through continued operations than simply shuttering the business. Chapter 11 is designed to preserve value and avoid waste. The collapse of a viable business because of a short-term liquidity issue is inherently wasteful and may actually injure creditors. Filing might be in the best interest of all parties involved.
3. Personal Guarantee of Business Debt
If you have guaranteed a business debt, that creditor will look to collect from you upon default. Owners of most small/medium-sized businesses are on the hook for various business debts. Maybe it’s a lease. Maybe it’s a bank loan or loan from the Small Business Administration. Or perhaps you’re liable on credit cards or to vendors. But when an owner is personally liable, walking away may bring the owner into the crosshairs. The lender may sue you personally and/or seek to liquidate your personal assets. Chapter 11 could be quite useful in such a situation. By continuing to operate, the business can continue to pay on the debt, while the owner seeks negotiate limits to any personal liability.
4. Multiple/Commercial Property – In Default
Since the real estate crash of 2008, Chapter 11 has provided a useful tool for those holding multiple real properties. Sometimes it’s one property in default. Sometimes it’s five. But filing a Chapter 11 case halts all foreclosure activity. From here, you have the time and flexibility to craft a solution. Depending on the facts, Chapter 11 bankruptcy can allow an owner to cure multiple mortgage arrears, sometimes rolling the arrear balance into the principal and reamortizing the loan over 30 years. In other instances, one property may be sold and the net proceeds used to cure the arrears on other properties. In general, a Chapter 11 bankruptcy creates options to deal with all mortgage defaults at once.
5. Aggressive Creditor Threatening the Business
Maybe you see light at the end of the tunnel. Maybe you have a viable solution, if that one particular creditor would just be reasonable. Chapter 11 is designed to prevent one creditor’s aggressive collection activity from harming the other creditors and the bankruptcy estate. It’s one of the most useful aspects of chapter 11 – individual creditors are held at bay, to allow for the best result and recovery for all creditors. This concept is incorporated into bankruptcy law, and the process for confirming a chapter 11 plan.
Only a small percentage of bankruptcy attorneys practice in chapter 11. To select the right one, ask:
- Do you experience representing a Debtor in Possession in chapter 11?
- Can you give me a case number for a chapter 11 where they have successfully confirmed a chapter 11 plan?
- What is your specific plan for my case? i.e. What is the “end game”?
Beware. If the attorney cannot provide a meaningful answer to this, then you need to keep looking. Your best bet is to retain an attorney who practices in your geographic area. And lastly, if the attorney seems more interested in getting his/her retainer fee than figuring out the solution to your case, you’ll know where the attorney’s priorities lie.
Note: For individual filers, you may be over the debt limits under chapter 13. If so, chapter 11 may be your only option to restructure in bankruptcy. Read more in our on post on Too Much Debt for Chapter 13.
Choose a Qualified Chapter 11 Attorney.