Chapter 11 — Business Bankruptcy
If you own or operate a business with mounting debts and creditors are beginning to demand payment, but you can’t pay them, what can you do? You can go into denial and let it all drag out until things get really bad. You can consider trying to negotiate a workout arrangement with each creditor, but every option is just delaying the financial problems with no resolution in sight.
Have you considered putting the business into chapter 11 bankruptcy? Chapter 11 bankruptcy would allow you and your business to try to reorganize and restructure the debt, buying time to let you save the business or manage an orderly liquidation. Bankruptcy should not be your first choice, but it may be a good option.
The first step you should take is to hire a knowledgeable bankruptcy attorney with experience handling chapter 11 cases. The attorney will advise you regarding the feasibility of a successful Chapter 11 case and what to expect during the process.
What Is Chapter 11?
Chapter 11 is known as the “business reorganization” chapter of the Bankruptcy Code. Filing for bankruptcy relief under chapter 11 allows you to stay in business under the court’s supervision and work out a payment plan with your creditors. The goal of a chapter 11 case is for the business to continue operating and eventually become profitable. However, complex businesses or individuals with large, complex estates sometimes use it to liquidate assets.
Who Can Be A Chapter 11 Debtor?
Any individual or a business entity, such as a corporationor partnership, can be a debtor in chapter 11. Often, a business will use chapter 11 to restructure its operations and credit so that it can continue in business. Chapter 11 cases can be complex and take a long time, but a streamlined, less complicated process is available for certain small business debtors (defined as those with total debts less than about $2,566,050.00).
Chapter 11 relief is also available for individual debtors who want to reorganize but owe too much money to meet the eligibility requirements to restructure their debts in chapter 13 (also known as the individual reorganization bankruptcy).
What Happens in a Chapter 11 Bankruptcy?
Financial Disclosure. By the time you file your case, your attorney will have explained your obligations, whether your business can qualify as a small business for the streamlined process, and what else to expect. Your discussions with your attorney additionally will have included advice on whether companion bankruptcies of any guarantors, partners, or major shareholders, including yourself, would be prudent. To help you prepare for the case, your attorney will assist you in preparing the bankruptcy petition and a schedule of your business assets and liabilities, and income and expenditures. Along with that information, you will have to disclose tax returns and other relevant financial information. This information will be public once filed in the court. It must be true under penalty of perjury.
In some cases, your attorney will help you develop a plan of reorganization before the case is filed. This may require you and your attorney to negotiate with some or all the creditors in advance. If you can reach agreement on a plan before the case is filed through a “pre-packaged” chapter 11 case, it can save you significant time and money and help ensure a successful reorganization.
Automatic Stay Becomes Effective. Immediately upon filing the case, the automatic stay goes into effect. It protects bankruptcy debtors and their property by prohibiting creditors from taking any action to collect debt from the bankruptcy debtor without the court’s permission.
First Day Motions. The chapter 11 debtor will become the “debtor in possession”. No trustee is appointed to operate the business (unless fraud or dishonesty is involved), but all debtors will operate under some oversight by the United States Trustee. To operate the business under chapter 11, the debtor in possession will be required to obtain permission from the court to use the funds of the business that are collateral for creditors, employ counsel, and make certain payments such as employee wages. These matters are brought before the bankruptcy court through “First Day Motions” filed by the debtor’s counsel. The court will hear these on an expedited basis.
Debtor in Possession Obligations. The debtor in possession will have the responsibilities to manage the business and satisfy certain obligations that are imposed by the Bankruptcy Code, including:
- Meeting with creditors.
- Developing and filing a plan of reorganization showing how the business will become profitable, such as by modifying payment obligations and selling unnecessary assets.
- Employing experts, with the court’s permission, such as accountants, turn-around consultants, or other experts required for a successful reorganization.
- Filing a plan within a reasonable time period. The debtor in possession has a 120-180 -day exclusive period to file a plan. After that, creditors can file a competing plan.
- Making adequate protection payments to creditors to cover property the debtor needs to operate the business.
- Filing monthly operating reports on the business.
- Challenging the validity of creditor claims, as appropriate.
Plan Confirmation. The bankruptcy court will confirm a viable plan of reorganization. Normally, the plan will reduce payment obligations, extend payment periods, reject unperformed contracts, and abandon or liquidate property that is not needed by the reorganized business. In the case of a corporation, the stock of the debtor in possession is usually cancelled, and those shareholders receive no value. New stock in the newly reorganized company may be issued to creditors and any shareholders that have provided new capital.
Once a plan is confirmed, creditors cannot attempt to collect from the debtor in possession on any debt or portion of debt that is not paid under the plan. If no plan can be confirmed, the court will either convert the case to a chapter 7 liquidation case or dismiss the case altogether. If the case is dismissed, automatic stay terminates, and the creditors can resume lawful attempts to collect the debt.
Employing Experienced Counsel Is Imperative
A chapter 11 proceeding is complicated and expensive. You will need expert legal assistance to go through a chapter 11 process successfully. Counsel with experience in complex chapter 11 cases will save you time and money in the long run. Not only that, expert counsel will give you and your business the best chance at a successful reorganization.