Law Offices of Nicholas Gebelt

Are There Any Restrictions On The Size Or Type Of Business That May File Under Chapter 11 Bankruptcy?

Any business can file for Chapter 11 bankruptcy protection.

However, there is a debt ceiling of $2,725,625 for businesses filing under Subchapter V of Chapter 11. As a result of the COVID-19 pandemic, Congress temporarily increased the ceiling to $7,500,000 until March 27, 2021. After that date, the ceiling reverts back to $2,725,625.

Does A Person Have To Be Engaged In Business To Qualify For Chapter 11 Relief?

Originally, Chapter 11 was thought of as a business reorganization Chapter. However, Congress amended the Bankruptcy Code to allow individuals and legally married couples to file for Chapter 11 protection.

Chapter 11 is the most complicated Chapter in the Bankruptcy Code, and it is concomitantly expensive. This means that it is generally not the first choice for an individual or a married couple. Instead, such debtors usually file under either Chapter 7 or Chapter 13. Then why would an individual or married couple file under Chapter 11?

Chapter 7 has income ceilings. Congress has given us a two-part test called the means test to determine eligibility for Chapter 7 protection. If a debtor’s income is too high as measured by the means test, the debtor is ineligible to file under Chapter 7. There is an exception worth noting: If the debtor’s debts are primarily not consumer debts, then the means test is inapplicable.

Unlike Chapter 7, there is no income limitation in Chapter 13, other than that the debtor has to have enough income to support the Chapter 13 repayment plan. There are, however, two debt ceilings. One is for secured debts and the other is for unsecured debts. If an individual or a married couple exceeds either of those debt ceilings, then Chapter 13 is unavailable.

When an individual or legally married couple’s income is too high for Chapter 7, and if their debts are too high for Chapter 13, we put them in a Chapter 11.

Is A Chapter 11 Discharge Valid If The Debtor Later Fails To Carry Out The Plan?

The answer to this question depends on whether the debtor is an individual or a business.

On the one hand, an individual doesn’t get a discharge upon plan confirmation. Instead, the debtor must make plan payments for between three and five years prior to receiving a discharge. Thus, the debtor will have substantially consummated the plan at discharge, so there probably won’t be a problem with the validity of the discharge in an individual case.

On the other hand, a business debtor usually receives a discharge when the Court confirms the plan. If the debtor has not been in a confirmed plan for very long and isn’t complying with the terms of the plan, the Court can dismiss the case, or convert it to one under Chapter 7.

The fact that there is a discharge might suggest that if the debtor fails to perform, a creditor has no recourse, but that is incorrect. The order confirming the plan typically contains a provision that says that the Bankruptcy Court retains jurisdiction over the case. One way to think of a Chapter 11 plan is as a contract between the debtor and the creditors that is overseen by the United States Federal Government. If the debtor breaches the contract, the Court has the authority to dismiss the case, or convert it to one under Chapter 7.

Moreover, if the debtor defaults on a secured debt, the creditor can ask the Court to lift the automatic stay so that the creditor can repossess, or foreclose on, the property.

For more information on Business Bankruptcy In California, a free 20 minute phone strategy session is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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