Chapter 11 Bankruptcy Filing

Chapter 11 Bankruptcy

Chapter 11 bankruptcy  is often used by corporations with heavy debt but can be used by small entities as well. In rare cases , consumers may file a Chapter 11 bankruptcy. The debtor may propose a plan to cut operating costs and  to increase profits after bankruptcy to hold creditors at bay as well as looking at other sources of revenue. Chapter 7 bankruptcy means closure of the business and sale of assets to pay creditors. The advantage of a Chapter 11 bankruptcy if you qualify is that you have some time to reorganize, strategize and then submit a plan . This is complicated, time consuming and costs more than other forms of bankruptcy.

Chapter 11 Bankruptcy Filing Process

The debtor or the creditors may file for a Chapter 11 bankruptcy. When the creditors file a Chapter 11 bankruptcy it is called an involuntary petition. The case begins when the petition is filed with the US Bankruptcy court. An automatic stay of all collection actions is put into place. This means that creditors cannot pursue current or new collection activities for unpaid debt unless the court issues a modification to the stay. This gives the debtor time to organize, plan and negotiate the payment terms of debt and not worry about current payments.

When the petition is filed the business may continue with regular activities. Under the supervision of the bankruptcy court, the debtor reorganizes, strategizes and plans on how the business is going to go about repaying creditors. Usually the repayment amounts are lower than the original debt payments.The debtor may object to creditors claims during the case if legitimate. The debtor needs to submit monthly operating reports to the court so that the court can monitor progress and compliance.

Chapter 11 Bankruptcy Plan

 The main objective of filing a Chapter 11 bankruptcy instead of a Chapter 7 bankruptcy is to become profitable.The debtor has to re-negotiate rentals, leases and contracts with debtors and have outstanding debt discharged or reduced.

Creditors have the incentive to cooperate with the debtor since they would not generally be getting a better deal from a Chapter 7 bankruptcy.

A reorganization plan puts creditors into different classes. First priority is given to state and federal tax agencies, wages and salaries owed to employees and stockholder interests. These all have their own class. Secured and unsecured creditors all have their own class.The reorganization plan may adjust repayment terms to these creditors. The plan must be voted on by creditors and also approved by the court.

Confirmation and Debt Discharge

A well structured plan done in good faith and within the law, will be confirmed by the court in most cases.Debts that are not directly addressed in the plan but existed before the confirmation are discharged.The debtor is required to pay creditors and operate in accordance with the reorganization plan.

Chapter 11 Bankruptcy Filing for Small Businesses

Large corporations are usually associated with Chapter 11 bankruptcy but it is also available to small businesses.A small business is defined as a business with less than 500 employees.When the court decides that a business is not viable and cannot become profitable it will dismiss a Chapter 11 bankruptcy and convert to a Chapter 7 bankruptcy.Partnerships have few bankruptcy options and may file a Chapter 11 bankruptcy if the business has a chance of surviving and making a profit.

A “small business debtor” is an individual with a debt of no more than $ 2.19 million at the time of submission according to the US Bankruptcy Code.

Filing requirements for small businesses are as follows:

  • Most recent balance sheet
  • Statement of operations
  • Cash flow statement
  • Most recent federal income tax return

The court exerts greater oversight on small business Chapter 11 filings than on  larger entities . The court requires reports on profitability and projected cash receipts and disbursements. The court also appoints a US trustee to the case.

Chapter 11 bankruptcy filing provides a small business time to plan, reorganize and strategize how to pay debtors and to make the business profitable (180 days) . However, it is very costly (tens of thousands of dollars in legal fees) and is sometimes not affordable for struggling business. It is advisable to discuss your options with an experienced bankruptcy attorney before you decide.

For those business owners who prefer not to avoid a Chapter 11 bankruptcy filing, there are several other debt relief strategies. Speak to our experienced business debt relief lawyers to find out more about: