There are many different types of bankruptcies. Often, each type is referred to by the name of the Chapter in which it is contained in the United States Bankruptcy Code. You’ve probably heard of Chapter 7 and Chapter 13, and maybe even Chapter 11 bankruptcies. The following information may be useful to a business which is considering filing under Chapter 11.
Chapter 11 Reorganization
Chapter 11 bankruptcies are intended to allow reorganization in order to pay creditors, rather than discharge debts owed. For this reason, Chapter 11 bankruptcies are often referred to as reorganizations.
Owner Liability in the Chapter 11 Bankruptcy of a Business
There are important distinctions that should be drawn between businesses and the owners behind them. There are several important reasons to keep business and personal separate – if you have a business, some of them are probably reasons you set it up.
LLCs and Corporations, for example, provide business owners limited liability. A business will be liable for actions of the business, but the owners behind the business will not be. There are, of course, exceptions. Sole proprietorships, unlike LLCs and Corporations do not afford the owner with these limited liability protections.
Similarly, owners of LLCs and Corporations are separate from their businesses when it comes to bankruptcy, and sole proprietors are not. If an LLC or Corporation files for bankruptcy, the owners’ assets are not subject to the bankruptcy – the owners are not subject to the bankruptcy. However, if a sole proprietorship files for bankruptcy, the owner is not protected in this way and the owner’s personal assets are at risk.
Limitations of Filing Chapter 11 Bankruptcy
An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e).
In addition, no individual may be a debtor under chapter 11 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.