It usually comes up early in a call. An owner has a few merchant cash advances stacked on top of each other and asks whether they should just file Chapter 11. And that raises a question. Does everyone get to file Chapter 11, or is it only available to certain types of filers? A lot of people think this chapter is reserved for the biggest companies in the country, but the truth is, it’s not just for them. Chapter 11 gives people or businesses a way to deal with reorganization while still protected from their creditors. It’s labeled “Reorganization.” At Delancey Street we’re a business debt settlement company, not a law firm, so we don’t file these cases, but every owner weighing their options should know who Chapter 11 is built for.
The Five Types of Filers
Legally, everybody can file except for governmental agencies, estates, trusts that don’t do business, stockbrokers, commodity brokers, insurance companies, banks, and SBA-licensed small business investment companies. There’s no rule that you have to be broke or facing financial trouble to file a Chapter 11 on your own. Put another way, there’s no set financial or insolvency threshold beyond the requirement of good faith (which basically means you’re filing primarily to reorganize). You can be solvent, you can be insolvent, your assets can outweigh your liabilities by any number, you can be making a lot of money or no money - there are no constraints on that. The business can be very big, very small, or any size in between. And under Chapter 11, the business can be a sole proprietorship, partnership, limited liability company, or corporation of any size. Add people who aren’t running a business at all, and you have the five types of filers.
The first is the sole proprietor. If you own your business as a sole proprietor (aka you haven’t set up a corporation to protect you from the liability the business may be creating), then you can file Chapter 11. There’s no cap on how big your business can be. Whatever its size, a sole proprietorship is a legitimate filer.
Second, partnerships. Yeah, a partnership can file Chapter 11. There’s no limit on how big the partnership can be. In partnership cases, the partnership itself is the Debtor, as in other Chapter 11 cases.
Third, limited liability companies. An LLC can file for Chapter 11. Smaller businesses, whatever their structure, may also be able to choose treatment as a small business debtor. To be a small business debtor, you need to be running a commercial or business activity (other than one mainly in the business of owning or managing real estate) and your total noncontingent liquidated secured and unsecured debts can’t be more than $2,190,000 when the case is filed. If the business checks the appropriate box on its petition, it will be treated as a small business debtor until the court says otherwise, and the case moves faster because a creditors’ committee isn’t required, the period for filing plans is shorter, and getting a plan accepted is simpler.
Fourth, corporations. If you formed a corporation to own and operate your business, you’re going to be a corporation and you can file under Chapter 11. Chapter 11 is available to corporations, but there is no minimum size. A corporation with tiny debts and equity interests can file under Chapter 11. For corporations and LLCs alike, the timing of the discharge differs from an individual’s case. In a Chapter 11 that’s filed by a corporation, limited liability company, or some other nonindividual entity, the debtor gets a discharge as soon as the plan is confirmed. A discharge is a court order that frees the debtor from certain debts.
Fifth, individuals. It doesn’t have to be a business to file Chapter 11. Legally, a consumer can file a Chapter 11, but in practice you have to have something to reorganize, rehabilitate, or liquidate before a Chapter 11 can be granted. Even if you’re not in business in the traditional sense, if you have large investments or assets, a Chapter 11 can be used to reorganize or liquidate those investments or assets. And an individual can’t file if he or she had a case dismissed for certain reasons in the last 180 days. In a Chapter 11 case filed by an individual, a discharge is granted by the court separately, after the completion of payments under the plan.
Being Eligible Is the Easy Part
Being eligible is the easy part. In practice, it’s available to just about any business or person that can afford it. Your Chapter 11 filing fee is $1039. But there is also a quarterly fee due to the U.S. Trustee — the amount of this fee can vary between $250 to $10,000 each quarter. Lawyer fees for small business cases might be $15,000+ for a simple case, or much, much more if it’s a larger, more complex case. Debtors who can’t pay the filing fee when they file Chapter 11 usually don’t succeed. What the money buys is real, though. When a Chapter 11 is filed, the automatic stay stops foreclosures, collections, civil lawsuits, and any action by creditors against the debtor or its property. That even means no phone calls or letters or bills sent to the debtor to collect prepetition debt. You also typically get a few-month-long pause before you have to pay some of your debts.
A More Affordable Solution
So which of the five you are matters less than whether Chapter 11 is worth its cost for you. If a bankruptcy makes sense for you, we’ll refer you to a reputable independent lawyer, and you’ll form an attorney-client relationship with that lawyer. Your first consultation is free and confidential. If there’s a more affordable solution, we’ll say so on the first call. If bankruptcy’s the better route, we’ll steer you to a bankruptcy lawyer for something like a Subchapter V. Our advisors talk with your MCA funders and lenders to get you a lesser payoff than what’s owed. We’re not a loan company.
