The High Costs of Chapter 11 Bankruptcy: Factors Contributing to Expensive Proceedings
Chapter 11 bankruptcy is a type of bankruptcy proceeding that allows businesses, and sometimes individuals, to reorganize their debts and assets while continuing to operate. It allows the debtor to restructure their finances and create a payment plan for creditors over time instead of selling assets to pay off debts, as in Chapter 7. However, due to its complexity, it can be an expensive process. In this article, Robert Stiberman, a business bankruptcy attorney, discusses the high costs of chapter 11 bankruptcy.
Stiberman Law, P.A. is a bankruptcy law firm that operates throughout Florida. The firm provides free consultations to businesses and individuals struggling with debt-related issues. Robert Stiberman is a renowned bankruptcy attorney with over 15 years of experience representing clients dealing with bankruptcy cases. Mr. Stiberman earned his Juris Doctorate from the University of Miami School of Law, has been a member in good standing of the Florida Bar since 1998, and is admitted to practice in the bankruptcy courts for the Southern, Middle, and Northern Districts of Florida. At Stiberman Law, we empathize with the stress and uncertainty often accompanying financial challenges. We aim to support and guide clients through bankruptcy with compassion and professionalism.
Why Is Chapter 11 Bankruptcy More Costly Than Other Types of Bankruptcy?
Chapter 11 bankruptcy is often more expensive compared to other types of bankruptcy due to several factors:
- Complexity: Chapter 11 bankruptcy cases are generally more intricate than Chapter 7 or Chapter 13 cases. They require extensive negotiations with creditors, the development of a comprehensive reorganization plan, and multiple court hearings.
- Length of the process: Chapter 11 bankruptcies typically take longer to resolve, resulting in higher professional fees.
- Involvement of multiple professionals: Chapter 11 cases may require the services of various professionals, such as attorneys, accountants, financial advisors, and industry experts, who all charge fees for their services.
- U.S. Trustee fees: Chapter 11 cases require payment of quarterly fees to the U.S. Trustee’s office, which can be significant for larger cases.
- Administrative expenses: In Chapter 11 bankruptcy, the debtor must pay ongoing administrative expenses such as rent, utilities, and employee salaries.
- Creditor Committee expenses: In some cases, a committee of unsecured creditors may form, and the debtor may be responsible for paying the fees and costs of the professionals hired by the committee.
- Filing fees: The filing fee for Chapter 11 is higher than that for other chapters; currently, it is $1,738 compared to $338 for Chapter 7 and $313 for Chapter 13.
Due to these factors, the costs associated with Chapter 11 bankruptcy can quickly add up, making it a more expensive option than other types of bankruptcy. However, for businesses and individuals with substantial debts and complicated financial situations, Chapter 11 may be the best option despite the higher costs.
Subchapter V of Chapter 11 Bankruptcy: A More Cost-Effective Option for Small Businesses
In 2019, the Small Business Reorganization Act (SBRA) added Subchapter V to Chapter 11 of the U.S. Bankruptcy Code. This new provision offers small businesses a more streamlined and cost-effective bankruptcy process. Here’s an overview of Subchapter V and its benefits:
- Eligibility: To qualify for Subchapter V, a business must have total debts of $7.5 million or less (excluding debts owed to insiders and affiliates), and at least 50% of those debts must have arisen from commercial or business activities.
- Faster process: Subchapter V cases move faster with shorter deadlines and lower fees.
- No creditors’ committee: Subchapter V does not automatically appoint a creditors’ committee, which can significantly reduce the costs associated with the committee’s professional fees.
- Simplified plan confirmation: Subchapter V offers small businesses a more streamlined plan confirmation process that simplifies and reduces the cost of obtaining approval for reorganization plans.
- No competing plans: In Subchapter V, only the debtor can propose a plan, reducing the likelihood of costly litigation and delays compared to traditional Chapter 11 cases where creditors can propose competing reorganization plans.
Small businesses eligible for Subchapter V can benefit from a more cost-effective option. However, it’s essential to seek guidance from an experienced bankruptcy attorney to determine if this path suits a specific business and ensure compliance with all requirements. An attorney at Stiberman Law can help you navigate the process and take advantage of the benefits provided by Subchapter V to minimize costs and achieve a successful reorganization.
Benefits of Hiring an Experienced Bankruptcy Attorney to Reduce Chapter 11 Costs
While Chapter 11 bankruptcy can be a costly process, hiring an experienced bankruptcy attorney can help reduce overall expenses in several ways:
- Efficient case management: An experienced attorney can expedite Chapter 11, minimizing delays and court appearances and reducing costs.
- Effective negotiation with creditors: A skilled bankruptcy attorney can negotiate better terms with creditors, potentially reducing total debt and reorganization costs.
- Strategic planning: An experienced attorney can craft a comprehensive and cost-effective reorganization plan that caters to the company’s unique needs and financial situation.
- Avoiding mistakes: Bankruptcy proceedings can be complicated, and mistakes can be expensive. An experienced attorney can help ensure all necessary documentation is filed correctly, and deadlines are met, reducing the risk of errors that could lead to additional expenses.
- Identifying cost-saving opportunities: A knowledgeable attorney can reduce costs in Chapter 11 by renegotiating leases, contracts, or labor agreements.
- Providing valuable insights: An experienced bankruptcy attorney can provide helpful advice based on past cases, helping debtors make informed decisions that lead to cost savings.
- Ensuring compliance: Compliance with bankruptcy laws and regulations is critical. An experienced attorney can assist the debtor in navigating these requirements, avoiding potential fines or penalties that could increase overall costs.
Hiring a bankruptcy attorney may come with costs, but the advantages of working with an experienced professional often surpass these expenses. A competent attorney can help the debtor navigate the Chapter 11 process effectively, leading to a more successful and cost-effective reorganization.
Alternatives to Filing Chapter 11
There are several alternatives to filing for Chapter 11 bankruptcy that businesses and individuals can consider, depending on their specific financial situation and goals. Some of these alternatives include:
- Out-of-court restructuring: This involves negotiating with creditors directly to restructure debts, modify payment terms, or obtain forbearance without filing for bankruptcy.
- Debt consolidation: Combining multiple debts into a single loan with a lower interest rate and more manageable payments can help businesses or individuals better manage their debts.
- Asset sales: Selling non-essential assets can provide funds to pay off debts and improve cash flow without filing for bankruptcy.
- Debt settlement: Negotiating with creditors to settle debts for less than the full amount owed can help reduce overall debt obligations.
- Seeking investors or strategic partners: Attracting new investors or strategic partners can provide an influx of capital to help a struggling business avoid bankruptcy.
- Chapter 7 bankruptcy (for individuals): If an individual has primarily unsecured debts and limited assets, Chapter 7 bankruptcy may be a quicker and less expensive alternative to Chapter 11.
- Chapter 13 bankruptcy (for individuals): For individuals with regular income and secured debts they wish to retain, Chapter 13 can provide a more straightforward and cost-effective reorganization option.
- Assignment for the benefit of creditors (ABC): This is a state-level insolvency proceeding where a company transfers its assets to a trustee who liquidates them and distributes the proceeds to creditors.
- Receivership: A court-appointed receiver takes control of a company’s assets and operations to restructure or liquidate the business under court supervision.
Before deciding on an alternative to Chapter 11, it is essential to consult with experienced legal and financial professionals to evaluate the specific circumstances and determine the most appropriate course of action.
Schedule a Free Consultation with a Florida Bankruptcy Attorney Today
Filing for bankruptcy can be daunting, especially if you don’t have money to spare. However, filing for Chapter 7 bankruptcy with no upfront costs is possible. At Stiberman Law we understand this can be overwhelming, but we offer affordable payment plans to ensure you receive the necessary representation, advocacy, and guidance for a better financial future. For a free consultation, please call us at (954) 922-2283 or fill out the form below to get started.
Sources:
- U.S. Code: Title 11 -Retrieved from https://www.law.cornell.edu/uscode/text/11
- Small Business Reorganization Act – retrieved from https://www.congress.gov/bill/116th-congress/house-bill/3311
- U..S Trustee Program – Subchapter V Small Business Reorganizations- Retrieved from https://www.justice.gov/ust/subchapter-v
Written By:
Robert is an experienced bankruptcy attorney adept at handling Chapter 7, 13, and 11 filings, with more than 15 years of experience in bankruptcy cases. Robert represents clients in both consumer and business bankruptcy ... Read More
