Q: Can you tell us a bit about Chapter 11 Bankruptcy?
A: “If you find yourself having to file Chapter 11 bankruptcy, it generally means that you had a good income at some point in your career; otherwise, you would not have racked up over $360,475.00 in unsecured debt. That being said, Congress realized that someone with this amount of unsecured debt could manage their own bankruptcy with an experienced attorney’s assistance. This bankruptcy is the most complex of all the individual bankruptcies. In this bankruptcy, the debtor must do all the same steps as Chapter 7 bankruptcy and prepare and propose a reorganization plan similar to Chapter 13. The difference between Chapter 13 and Chapter 11 is the debtor needs to do all the work of the Chapter 13 trustee and get the creditors’ approval for their plan of reorganization.
First, you will need to make sure that your income is sufficient to fund a reorganization plan. You need to be able to make payments to your secured creditors, your insurance premiums, your attorney fees, trustee fees, court fees, and some additional funds to pay towards your unsecured creditors. Your plan has to provide for more payments to your creditors than having filed Chapter7 bankruptcy.
Second, immediately after you file, you will need to close all of your bank accounts and set up new bank accounts with court-approved financial institutions. You will also need to file monthly operating reports detailing all of your income and expenses monthly.
Third, you will need to prepare a payment plan of reorganization to show how much each creditor will be paid during the plan, which usually is 3 to 5 years in length. The nice thing about a Chapter 11 plan is that you can negotiate any payment with your creditors so long as it is fair and reasonable. This includes payment on your federal and state taxes, student loans, and any other debts. It is the “let’s make a deal” bankruptcy option! There are ways to get financing in a Chapter 11 bankruptcy to fund your plan. We call this “Debtor In Possession” financing (aka DIP Financing). Basically, this allows new creditors to come in and provide funds in exchange for a super-priority interest in your assets. For example, let’s say you own a home worth $1,00,000.00 and owe $700,000.00 on the house. A DIP Finance company could give you $300,000.00 to fund your plan and receive a first mortgage in front of the $700,000.00 mortgage, thereby rendering the first mortgage into a second mortgage position. Granted, this kind of funding requires the court and a majority of the other creditor’s approval. Still, it gives you an idea of the various options available to a Chapter 11 bankrupt individual.
In short, a Chapter 11 bankruptcy requires a lot of reporting, negotiating, filings and effort. Still, the results can be excellent because it enables you to do things that otherwise would not be allowed under contract or tax law. Chapter 11 bankruptcy is expensive, but it is generally worth it.”
-Robert A. Pohl
