How does Chapter 11 bankruptcy work?

There are many different chapters of bankruptcy. The chapter that a debtor selects depends primarily on their individual needs and financial circumstances.

One option that is available to both individuals and businesses is a Chapter 11 reorganization. So, what does this debt relief option entail?

Who can file Chapter 11?

While individuals and married couples can file Chapter 11 bankruptcy, it is most common for businesses to use this option. For individuals, it mainly benefits those with complex asset structures or sole proprietors.  Business entities of all types and sizes that are struggling with debt can file Chapter 11, including corporations, limited liability companies, and partnerships.

Like other bankruptcy filings, businesses or individuals who file under Chapter 11 in New Mexico will benefit from the automatic stay. This stay of all debt collection attempts, including any pending litigation, gives business owners the space needed to successfully reorganize while maintaining control and operation of their business in most cases. This is different from other bankruptcy options such as Chapter 7, where a business must cease operating and a bankruptcy trustee is appointed to administer assets to pay creditors.

For some small businesses, a subchapter of Chapter 11 is now available, dubbed Subchapter V.  These cases are designed to be faster and less expensive to allow small businesses to take advantage of the Chapter 11 reorganization process.

Keyword: Reorganization

Chapter 11 bankruptcy is also called “reorganization bankruptcy.” The emphasis on reorganization is essentially what would allow business owners to continue running the business. They restructure their debt and create a reorganization plan to:

  1. Adjust their finances and expenses
  2. Renegotiate debt agreements and repay debts

This allows business owners to strategize how they can move forward and protect their business, while also managing their debt effectively.

However, they must make sure that their plan is:

  • Realistic for them to accomplish
  • Made in good faith
  • Fair for the creditors

Creating and then implementing the plan can often take a significant amount of time. It is not uncommon for reorganizations to take several months to a few years. That is why it is always critical to evaluate your individual needs as well as your end goals before moving forward, to determine which bankruptcy option is right for you.