Chapter 11 is available to both individuals and businesses. It allows debtors to, among other things, prevent foreclosure by curing past-due mortgage and property tax payments over time, avoid eviction, assume or reject executory contracts, and modify secured claims—including, in some cases, mortgage liens on a primary residence. Chapter 11 also permits the discharge of most types of pre-petition debt, such as credit cards, utilities, medical expenses, older income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo or HOA dues, mortgages, and car loans.
In a traditional Chapter 11 case, there are no debt limits or income-based eligibility restrictions. While the case is active, the debtor remains in possession and control of all property of the estate, and has authority—subject to court approval—to use, sell, or lease property, even outside the ordinary course of business. No trustee is appointed by default, and there is no automatic co-debtor stay.
The debtor in a traditional Chapter 11 case is granted an initial 120-day exclusive period to file a reorganization plan. However, there is no fixed deadline requiring the debtor to file a plan at all. To confirm a Chapter 11 plan, creditor approval is required. Generally, for a traditional Chapter 11 plan to be confirmed, it must:
Note: There is a split in authority as to whether the Absolute Priority Rule applies in individual Chapter 11 cases. As of now, the Third Circuit has not issued binding precedent on the matter.
Generally, a business debtor receives a discharge upon confirmation of the plan. An individual debtor, by contrast, typically receives a discharge only after completing all plan payments.
It is also important to note that certain Chapter 11 debtors receive specialized treatment under the Bankruptcy Code. These include: (1) the “single asset real estate” debtor; (2) the “small business debtor;” and (3) the “Subchapter V” debtor.
A Chapter 11 debtor qualifies as a “single asset real estate” (SARE) debtor if: (1) their primary business involves operating a single income-producing property (excluding residential real estate with fewer than four residential units or properties operated by a family farmer); and (2) substantially all of the debtor’s income is generated from that property.
Creditors of a single asset real estate debtor—especially those seeking to foreclose on the real estate—may be entitled to relief from the automatic stay under conditions that do not apply in standard Chapter 11 cases. Specifically, upon request by a creditor, the court will grant stay relief if, within 90 days of the petition date, the debtor has not either: (1) filed a feasible plan of reorganization; or (2) commenced making interest payments to the creditor in an amount equal to the non-default contract rate, based on the value of the creditor’s interest in the property.
If a SARE debtor does not meet one of these two requirements, the court is likely to grant the creditor’s motion for relief from the automatic stay—thereby allowing the creditor to initiate or resume foreclosure proceedings on the real property.
A Chapter 11 debtor qualifies as a “small business debtor” if the debtor: (1) is engaged in commercial or business activities (excluding single asset real estate cases); (2) has liquidated debts totaling no more than $2,725,625, with at least 50% of those debts arising from business operations; and (3) has not elected to proceed under Subchapter V.
A small business debtor is granted 180 days of exclusive time to file a plan and must file the plan no later than the mandatory deadline of 300 days from the petition date.
On February 19, 2020, the Small Business Reorganization Act (SBRA) became effective. The SBRA introduced a new category of Chapter 11 debtor entitled to special treatment under the Bankruptcy Code—known as a “Subchapter 5” debtor. Subchapter 5 was designed to create a more streamlined and cost-effective Chapter 11 option for individuals and businesses engaged in small business activities.
Subchapter 5 allows both individuals and businesses to, among other things, protect real estate from foreclosure by curing delinquent mortgage and property tax arrears over time, avoid eviction, assume or reject executory contracts, modify secured claims (including, in some cases, residential mortgage liens), and discharge most pre-petition debts, including but not limited to: credit card obligations, utility bills, medical expenses, older income taxes, deficiencies, lines of credit, rejected contracts, personal loans, personal guarantees, condo/HOA dues, mortgages, and car loans.
To qualify as a Subchapter 5 debtor, a Chapter 11 debtor must: (1) affirmatively elect Subchapter 5 treatment; (2) be engaged in commercial or business activities (excluding single asset real estate businesses); and (3) have liquidated debts not exceeding $7,500,000, at least 50% of which arose from such business activities.
While the case is pending, the debtor retains exclusive possession and control of estate property and is authorized to use, sell, or lease that property—subject to court approval if the transaction is outside the ordinary course of business. A trustee is automatically appointed in all Subchapter 5 cases. The trustee is tasked with investigating the debtor’s finances, assisting with plan confirmation, and, in certain circumstances, acting as disbursing agent for plan payments. There is no automatic appointment of an unsecured creditors’ committee, no obligation to pay quarterly U.S. Trustee fees, and the absolute priority rule does not apply.
Within 60 days of the petition date, the court will hold a status conference to promote the prompt and cost-efficient resolution of the case. At least 14 days before that conference, the debtor must file a written status report outlining efforts to achieve a consensual plan.
A Subchapter 5 debtor retains exclusive authority to file a plan at all times and must file the plan within 90 days of the petition date. Although creditors vote on confirmation, the court can confirm a plan even if all creditor classes reject it. To obtain confirmation, a Subchapter 5 plan generally must:
If the plan is consensual, the debtor receives a discharge upon confirmation. If the plan is non-consensual, discharge is granted only after all payments required under the plan are completed.