Chapter 11 Eligibility Requirements: 5 Tests Before a Business Can File

Most businesses can file for Chapter 11 bankruptcy. What matters is whether they qualify. There are five tests that determine whether a business is eligible. The first is the US connection test, which requires that the business have a home, a place of business or property in the US. The second is the allowed debtor type test, which excludes certain entities like brokers, banks, and insurance companies. If you are personally filing your case, you must also show that you have not had a case dismissed within 180 days for willful failure to follow the court’s orders. You must also show that you took an approved credit counseling course in the last 180 days. The next step is to make sure that you can pay the court’s fees to begin the case. If you cannot, the court may choose to throw out your case. Finally, if you want to take advantage of the faster small business track, you will need to have a debt of $3,424,000 or less.

Allowed to Start a Chapter 11 Bankruptcy

Under U.S. bankruptcy code, a business needs a “U.S. connection” to be allowed to start a Chapter 11 bankruptcy in the country. The main test is whether your business has a place of business, property or home in the U.S. If your business does qualify for a U.S. filing, it is allowed to choose the bankruptcy court for the location of its “domicile” or its principal place of business.

Chapter 11 is for any debtor that wants to reorganize itself, regardless of whether it’s a corporation, partnership, or proprietorship. In fact, even individuals can use Chapter 11. One quirk, however, is that Chapter 11 for a sole proprietorship pulls in the individual’s personal assets along with the business assets. By contrast, a key idea in bankruptcy is that a corporate business is a separate entity from its owners. Typically, this means that the corporation’s stockholders only risk their investment in the corporation’s stock. Nothing more.

Certain businesses are not allowed to use the Chapter 11 bankruptcy process to reorganize. Banks and other financial institutions like insurance companies and credit unions are not allowed to file for this type of protection. Savings and loan associations and SBA-licensed small business investment companies are also not allowed to use Chapter 11 to reorganize. Stockbrokers and commodity brokers are also excluded, but are allowed to file for Chapter 7.

If you file your Chapter 11 case as an individual, the court will impose several extra rules on you. First, you’ll have to pass a credit counseling class in the 180 days before you file your case. You are allowed to skip the counseling rule if you fall into one of a limited set of exceptions. These include cases where you’re in an emergency, disabled, incapacitated, or serving active military duty in a combat zone.

You’re not automatically disqualified if you have filed for bankruptcy in the past. You are allowed to go ahead if your case was dismissed in the last 180 days unless you willfully failed to obey a court order or dropped the case after your creditor sought relief from the stay against your assets.

Several Costs

Before you can begin filing for Chapter 11, you are required to pay several costs. These include an administrative fee ($571) and a filing fee of $1,167, or $1,738 in all. If you’re filing as an individual and low on cash, you may be able to get an installment payment plan for up to four installments within 120 days. Your case can be tossed out on unpaid fees. Make sure that you can afford ongoing fees. And, every quarter until the case is over, you will need to pay quarterly fees to the US trustee if you are using regular Chapter 11 and not the Small Business Subchapter V.

Chapter 11 Small Business

Your business can also use a different set of rules if its debts are below a certain level. There are two versions of small business Chapter 11. You can select the Small Business track, which has rules that will generally hurry you along more quickly than a regular Chapter 11, or you can choose the Subchapter V stream. To be qualified, your case must have debt of $3,424,000 or less on the day you file. And, 50% or more of your total debt must come from your commercial or business activity, rather than through your consumer activity. Also, special rules stop a small-business filer with a mostly single-asset real estate business from filing under either Subchapter V or Chapter 11 Small Business. The rule applies if you’re a single-asset business - you make most of your income from just one property.

If you can qualify for Chapter 11 small business, there are several advantages that can make it the way to go. One is speed. The Small Business and Subchapter V processes are supposed to be completed more rapidly than a regular Chapter 11 filing. In a regular Chapter 11 case, you have 120 days to file a plan or face having a creditor step up to file a plan. For Small Business cases, you have an extra 60 days - or 180 days from the start of the case - to submit a plan. In Subchapter V, only the debtor can file a plan. The regular Chapter 11 must use a separate disclosure statement laying out its finances. By contrast, the small-business Chapter 11 bankruptcy may not need a separate disclosure statement. And, no creditors’ committee is allowed unless there’s a cause shown. However, both Chapter 11 tracks require more reporting.

Before you start filing, run through these five tests in order. If you fail one of these tests early in the series, you won’t be able to file a Chapter 11. However, if you’re qualified except for the small business debt limit, you can still file a regular Chapter 11 and skip over the stream of small business rules.