Qualifications for Filing Chapter 11 Bankruptcy: Who is Eligible?

Filing for Chapter 11 bankruptcy can be a significant but potentially beneficial step for
businesses facing overwhelming financial difficulties. Unlike Chapter 7 bankruptcy, which
discharges unsecured debts in as little as four months, or Chapter 13, which arranges debt
repayment, Chapter 11 allows eligible parties to reorganize their finances while continuing
operations. Mr. Crawley at Crawley Law Firm, a knowledgeable and experienced Chapter 11
attorney, can guide you through the qualifications and processes needed to file for Chapter 11
bankruptcy. Here, we’ll explore who qualifies, how debt levels and business size affect eligibility,
and how a Chapter 11 attorney can assist in this complex yet potentially transformative process.

Understanding Chapter 11 Eligibility

To begin with, not every business qualifies for Chapter 11 bankruptcy. Generally, this chapter is
most appropriate for businesses—whether small, medium, or large—that need to restructure
their finances without shutting down operations. While individuals can file, it’s far less common
and often applied only when the person has high-value assets or extensive business-related
debts.

Who Can Apply for Chapter 11?

Chapter 11 eligibility primarily depends on factors like business structure, the amount of debt,
and the applicant’s financial situation. Both small businesses and large corporations can qualify,
provided they have a feasible reorganization plan that demonstrates their commitment to paying
off creditors over time.

General Qualifications for Chapter 11 Bankruptcy

• Business Viability: The business should have realistic potential to generate revenue
  post-bankruptcy.
• Debt Levels: There are no strict upper limits on debt under Chapter 11, but the court
  reviews debt levels to assess the feasibility of reorganization.
• Plan Feasibility: The applicant must provide a realistic and structured repayment plan,
  demonstrating to the court and creditors how debts will be handled.

Chapter 11 vs. Chapter 7 and Chapter 13: What’s the
Difference?

Understanding how Chapter 11 compares to Chapters 7 and 13 is important in choosing the
best path. Here’s how they differ:

Chapter 7: Fresh Start

In a Chapter 7 bankruptcy you wipe out your debts and get a “Fresh Start”. In a Chapter 7 bankruptcy there are many exemptions (see Arkansas Exemptions) and your property is protected. Certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony, child support, fraudulent debts, certain taxes, student loans, and certain items charged. (see Arkansas Non-Dischargeable Debts) In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills and very few assets. In the vast majority of cases a Chapter 7 bankruptcy is able to completely eliminate all of these debts.

You may keep certain secured debts such as your car or your furniture or house by reaffirming those debts. To do so, you must sign a voluntary “Reaffirmation Agreement”. If you decide that you want to keep your house or your car or your furniture, and you reaffirm the debt, you cannot bankrupt (or wipe-out) that debt again for eight years. You will still owe that debt, and you must continue to pay it just as you were obligated to continue to pay it before you filed bankruptcy. To reaffirm the debt, you must also bring it current. In other words, if you are three or four months behind, then you must pay the back payments which are due to reaffirm it. You can selectively reaffirm your debts – you can state that you wish to keep the house and the furniture, but that you want the car and the jewelry to go back to the respective Creditors.

Reaffirmation agreements can be set aside during the earlier of 60 days after the agreement is filed with the Court, or upon the Court’s issuance of an Order of Discharge.

Chapter 11: Reorganization

Chapter 11 bankruptcy prioritizes reorganization over liquidation, allowing the filer to retain
assets while restructuring debts. It’s ideal for businesses aiming to keep operations running and
eventually return to profitability.

Chapter 13: Individual Debt Adjustment

Chapter 13 is aimed at individuals with a steady income who wish to establish a repayment plan
over 3-5 years. Unlike Chapter 11, it doesn’t require extensive a reorganization process and is
more suited to personal debts than business ones.

Each type has unique eligibility and qualifications, making it essential to understand their
differences when choosing between Chapter 7, 11, or 13 bankruptcy.

The Role of Debt in Chapter 11 Eligibility

Debt plays a central role in determining Chapter 11 eligibility. Although there isn’t a strict cap on
debt levels, businesses or individuals applying for Chapter 11 must provide detailed
documentation of their debt structure, including:

• Secured Debt: These are debts tied to assets like real estate or equipment. Secured
  creditors are often prioritized in the repayment process.
• Unsecured Debt: Unsecured debts, such as credit card balances or vendor invoices,
  are usually repaid after secured debts, if funds are available.

The court evaluates both secured and unsecured debts to assess if a feasible reorganization
plan is achievable.

Business Size and Chapter 11 Eligibility

While Chapter 11 is available to businesses of all sizes, certain provisions within Chapter 11,
known as Subchapter V, are specifically tailored to streamline the process for small businesses.
This provision aims to reduce costs and simplify the filing process for smaller enterprises,
making Chapter 11 a more accessible option for businesses with limited financial resources.

• Large Corporations: Large corporations use Chapter 11 to reorganize debts while
  continuing operations, often leading to complex restructuring plans that may include
  selling assets, renegotiating leases, or downsizing.
• Small Businesses: For small businesses, the process is generally simpler and more
  streamlined, especially under Subchapter V, which enables a quicker path to approval
  and reorganization.

Financial Situation and Feasibility of Chapter 11
Bankruptcy

One key requirement in Chapter 11 is proving the feasibility of debt repayment. This means
assessing:

• Projected Income: The court needs evidence that the business or individual can
  generate income sufficient to meet the repayment obligations.
• Cash Flow: Maintaining cash flow during the reorganization process is crucial for
  funding operations while gradually paying off creditors.
• Business Plan Viability: A detailed business plan or reorganization strategy is
  essential, showing how the filer plans to stabilize finances and increase revenue.

Legal Requirements and Obligations

When filing for Chapter 11, applicants face several legal requirements:

1. Filing Paperwork: The initial paperwork involves a petition and schedules detailing
   assets, liabilities, income, and expenditures.
2. Reorganization Plan: This plan outlines the steps to pay off creditors over time.
3. Court Appearances: Filers must attend court hearings to present their plan and answer
   questions from the court and creditors.
4. Compliance: Strict adherence to legal timelines and reporting requirements is
   necessary to avoid complications in the case.

The Chapter 11 Filing Process: A Step-by-Step Guide

Filing for Chapter 11 can be a complex journey. Here’s a basic outline:

1. Initial Petition: The applicant files a petition with a bankruptcy court.
2. Automatic Stay: This halts collection activities from creditors.
3. Drafting the Reorganization Plan: A detailed plan for debt restructuring is drafted,
   often with the assistance of a Chapter 11 attorney.
4. Creditor Approval: Creditors review and vote on the proposed plan.
5. Court Approval: If creditors approve, the court gives the final green light.
6. Execution: The business or individual begins executing the reorganization plan under
   court supervision.

Successful Outcomes in Chapter 11

While the journey through Chapter 11 can be demanding, many businesses emerge stronger.
Factors that contribute to success include realistic planning, thorough documentation, and
strategic asset management, all coordinated under the guidance of experienced Chapter 11
bankruptcy lawyers.

Is Chapter 11 the Right Choice?

Chapter 11 bankruptcy isn’t for everyone. But for those who qualify and have the guidance of a
trusted Chapter 11 attorney, it offers a path to reorganization and financial recovery. Consider
all options carefully and consult with our professional attorney to determine the best course for
your financial situation.

An experienced chapter 11 attorney, like Mr. Crawley, can make a significant difference in
navigating the complexities of Chapter 11. From ensuring documentation accuracy to
negotiating with creditors, Crawley Law Firm’s attorney’s expertise provides essential guidance
throughout the process.