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Who Can File for Chapter 11 in California?
Chapter 11 is sometimes overlooked as a bankruptcy filing option among Californians, not only due to the complexity of the process, but also the rarity with which it is used compared to other chapters of bankruptcy. Among the 20,379 total bankruptcy filings in the U.S. Bankruptcy Court for the Eastern District of California during 2014, the vast majority involved Chapter 7 (16,652 total) or Chapter 13 (3,628 total), compared to just 84 Chapter 11 cases filed during the same time period. Phrased another way, Chapter 7 accounted for about 82% of the cases filed in 2014, while Chapter 13 accounted for 18%, and Chapter 11 accounted for less than 0.5%.
Chapter 11 is normally utilized by businesses, though in rare circumstances individuals may file under Chapter 11 as well. While most individual debtors are better served by Chapter 7 or Chapter 13, Chapter 11 may be appropriate for an individual filer if he or she has too much disposable income to file under Chapter 7, which is decided by a process called “means testing,” and has too much debt to file under Chapter 13. As of April 2016, under federal law an individual cannot file for Chapter 13 if his or her unsecured debts exceed $394,725, or if his or her secured debts exceed $1,184,200. These figures are periodically adjusted to account for inflation.
Chapter 11 is frequently utilized by business entities because they are prohibited from filing under Chapter 13, while filing under Chapter 7, which is permitted, will result in liquidation of the company’s assets. If a corporation, partnership, or limited liability company (LLC) wishes to avoid closure and remain operating throughout the bankruptcy, it is generally necessary to file under Chapter 11. Bankruptcy regulations are federal, meaning these rules apply not only to individuals and businesses in California, but throughout the United States.
What Happens to Debt in Chapter 11?
PacSun’s debt reduction was impressive, but pales in comparison to the Chapter 11 plan for oil and gas company Penn Virginia Corporation announced in mid-2016. According to a report in Law360, “Penn Virginia said that it has entered into a restructuring support agreement with creditors that hold approximately 87% of its funded debt obligations, about $1.03 billion.” While few filers are dealing with that level of debt, Chapter 11 can nonetheless result in substantial reductions to the amount the debtor owes.
Similar to Chapter 13, Chapter 11 is a reorganization bankruptcy in which the filer’s debts are restructured in accordance with a plan of reorganization. After the plan of reorganization is confirmed, most of the filer’s debts will be discharged. However, if the filer is an individual, no discharge will be granted until the debtor has made all payments provided for in the plan. The plan will not be confirmed by the bankruptcy court unless it is fair, feasible, and serves the best interests of the creditors involved.
Unlike a Chapter 13 or Chapter 7 bankruptcy, it is relatively uncommon for California bankruptcy courts to appoint a trustee to administer a Chapter 11 plan. In many though not all Chapter 11 cases, the debtor, who is called the “debtor in possession,” continues to run the business. However, the bankruptcy court will have discretion over any major decisions regarding the business, such as signing a lease, entering an agreement with a vendor, or expanding the business by opening more locations. A Chapter 11 case may conclude in as little as several months, but more typically takes several years to resolve.
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