16 June 2021 / Scott D. Fink

Bankruptcy Basics: Chapters 11 & 12 Filings

Topics: Bankruptcy

The COVID-19 pandemic has had a chilling effect on bankruptcies, however many experts anticipate a flurry of new filings in the very near future, especially as existing holds on collection activities are lifted. Now is the time for creditors and their decision makers to gain a firm understanding of bankruptcy concepts, tasks, and deadlines. 

While we’ve covered top FAQs on chapters 7 and 13 bankruptcy filings, it’s time to explore chapters 11 and 12. In a recent Ask a Pro webinar series, “Navigating Chapters 11 & 12 Bankruptcies,” shareholders Geoff Peters and Scott Fink share key insights that will help you grasp the intricate details of these common filings.

Watch the Webinar

Here’s a quick preview of some of the top questions – and our respective answers – from this series:

What are the main differences between a chapter 7, chapter 11, chapter 12, and chapter 13 bankruptcy? 

Let’s review the basics for each chapter filing:
  • Chapter 7: The purpose of a chapter 7 is to liquidate assets not protected by exemptions and maximize returns for creditors. Both individuals and businesses can file for chapter 7. The courts may provide businesses that file chapter 7 with a trustee that operates the business for a period of time. In general, the trustee will take charge of asset liquidations and proceeds. Ultimately, a chapter 7 bankruptcy brings a business and its ownership to an end. 
  • Chapter 11: This is a reorganization bankruptcy with no debt limits, available to both individuals and businesses. Unlike chapter 7, the debtor doesn’t have to sell off all of his or her assets. If the debtor is a business owner, he or she can remain in control of business operations throughout the duration of the bankruptcy and afterward, if successful.
  • Chapter 12: This chapter is limited to family farmers and family fisherman. Again, the purpose is to reorganize their debts so they can maintain their assets. However, there are some debt limitations with chapter 12. For family farmers, the debt ceiling is $10 million, and for family fisherman the limit is $1.9 million.
  • Chapter 13: Also known as the “wage earner’s plan,” this filing is only available to individuals. Again, the purpose is a reorganization of debts. There are debt limits. The limit for unsecured debt is just under $420,000 while the secured debt limit is just under $1.3 million. 
The main difference between these four filings is that chapters 11, 12, and 13 reorganize debts, allowing the debtor to retain property, while chapter 7 is a complete liquidation. Also, it’s important to keep in mind that chapters 11 and 12 are much more complex processes because of the higher debt limitations. These bankruptcy plans often involve extensive negotiations with the secured debt holders and creditors involved in the case.

What debts are dischargeable in bankruptcy?
Generally, all debts included in a bankruptcy petition are dischargeable. However, there are some exceptions. In Section 523 of bankruptcy code, which applies to almost all chapters of bankruptcy, non-dischargeable debts include (but are not limited to):
  • Fraudulent activity
  • Certain unpaid taxes
  • Debts for willful or malicious injury to another person
  • Alimony and child support
  • Student loans (with a few rare exceptions)
  • Court fines and penalties 
(One note: Most of these are presumed to be non-dischargeable. But it is incumbent on the creditor to get the judge to declare those debts as non-dischargeable. Fraud and willful and malicious injury need to be presented to the court and receive a ruling that they are, indeed, non-dischargeable.)

Does the co-debtor stay exist in all chapters of the bankruptcy code?
The co-debtor stay only applies to consumer debt, not commercial debt. Therefore, it does NOT exist in all chapters – only chapters 12 and 13. 

With that said, a creditor can file a motion asking the court for relief against the co-debtor stay in those chapters. However, you need to prove to the court that someone else is liable for the debt and that the co-debtor stay will prejudice you as the creditor should it remain intact. If you show that, the co-debtor stay can be lifted in chapter 12 and 13 scenarios. 

When does a plan get filed in a chapter 11?
In chapter 11, an individual debtor or corporation has 120 days to file a plan. This is called the “exclusivity period,” and only the debtor can file a plan within those first 120 days. Afterward, a creditor can propose their plan. 

In a corporate filing, the business also includes a disclosure statement, which includes background on the case, why the enterprise is in bankruptcy, and projections going forward. A creditor can review this statement to understand the state of the business and determine whether or not to agree with the plan. 

There are some exceptions to the bankruptcy code for small businesses. As part of the Small Business Reorganization Act (SBRA), bankruptcy was made into a faster, more affordable process for small businesses. As a result, there is no exclusivity period because only the business files a plan. No disclosure statement is necessary either. 

Why would someone file a chapter 12 versus chapter 13? 
A chapter 12 bankruptcy filing offers a few benefits to eligible debtors (family farmers and fisherman). Not only does chapter 12 statute allow for up to 90 days to file a repayment plan, but the filing fees are significantly less and debtors are allowed to make seasonal payments to align with when they earn an income. Also, there are some noticeable tax liability differences. For instance, if a family farmer were to sell some assets during a chapter 12 plan, any taxes arising from the sale are deemed as unsecured and can be discharged from the case. 

What is chapter 11 “debtor in possession”?
Upon filing for chapter 11 bankruptcy, the debtor immediately becomes the “debtor in possession.” Unlike chapters 7 or 13, there is no trustee appointed to the case.  The debtor controls and operates their own financial affairs, whether an individual or business. He or she also obtains the right to employ professionals (i.e. accountants, lawyers, appraisers, auctioneers, etc.) to help reorganize the debts.

Why is there no trustee? Because the debtor gets a second opportunity to reorganize their finances and work with creditors without intervention. However, the case is still overseen by the U.S. Trustee, who pushes the case forward and reviews monthly operating reports (filed by the debtor) to ensure things are going smoothly. 

For more comprehensive FAQs and insights about chapters 11 and 12 bankruptcy practices, watch the full webinar here. If you have additional questions that need to be answered, please contact our bankruptcy team

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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