Who Can File Chapter 11?
The federal bankruptcy code specifies the provisions under which individuals and business entities may seek bankruptcy protection. Chapter 7 and Chapter 13 are typically used by consumers while Chapter 11 is directed at business entities. If you own or operate a business and are struggling to repay your creditors, it's important to understand what criteria must be met to file Chapter 11.
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Eligibility
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The federal bankruptcy code permits any individual, partnership or corporation to file Chapter 11, with the exception of a stockbroker or commodities broker. This includes businesses that function as a sole proprietorship. It's important to note that in these instances, your personal assets are not considered separate from your business assets. Chapter 11 also can be used by railroad companies or by family farming operations whose debts exceed the limits allowed in Chapter 12. There is no limit to the amount of debt you may include in a Chapter 11 filing, unless you elect to file as a small business debtor.
Small Business Debtor
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A small business debtor is defined by specific criteria established by the federal bankruptcy code. To qualify, you must be engaged in commercial or business activities not related to owning or operating real property. As of 2010, small business debtors are limited to $2,190,000 in total secured and unsecured debt. In most Chapter 11 cases, the court will appoint a creditors' committee, composed of your seven largest unsecured creditors, to oversee your case at the direction of the bankruptcy trustee. In order to be deemed a small business debtor, the court must determine that no such committee is necessary.
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Single Asset Real Estate Debtor
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The single asset real estate debtor is also considered a special case under Chapter 11. To qualify as a single asset real estate debtor, you must own and operate a single property or project, other than residential property with less than four units. This property must generate the majority of your gross income solely through its operation and maintenance. If business operations take place on the property, you cannot qualify as a single asset real estate debtor. As of 2010, there is no limit to the amount of secured debt that a single asset real estate debtor may claim.
Involuntary Chapter 11
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The federal bankruptcy code also allows your creditors to initiate an involuntary Chapter 11 proceeding against you. Your creditors may pursue an involuntary petition if you are behind on your debts, are avoiding their efforts to collect or if they feel that there is the potential for you to divest yourself of your assets and file bankruptcy voluntarily under Chapter 7. An involuntary Chapter 11 petition can be filed against any debtor with the exception of family farmers, banks, insurance companies, credit unions, nonprofit agencies and savings-and-loan organizations. As of 2011, if you have 12 creditors or more, at least three of them who are owed a total of $10,775 or more must submit the petition. If you have fewer than 12 creditors, only one is needed to file as long as they are owed $10,775 or more.
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