Bankruptcy is an ever present specter for businesses large and small, and though it can happen unexpectedly or over a long, drawn out process where the business just can’t manage its debts, it’s not the end of the world. A business has the option to file for Chapter 11 reorganization bankruptcy.
Naturally, if it’s your business that you have started and grown from small through medium to large, it can be quite a blow when you find that there are problems with the business’ finances. When you reach the stage where you have financial difficulties that you can’t sort out yourself, then you need to look at options for moving forward as soon as you can.
As a business, therefore, you have the option to file for Chapter 11 bankruptcy, but you need to know what is involved and the implications of doing so. You can also file for Chapter 11 as an individual sole trader or as a partnership if the circumstances permit.
An Overview of Chapter 11 Reorganization
How to Start
A Chapter 11 bankruptcy case starts when a petition is filed in the bankruptcy court and is usually voluntary. As the debtor, you will generally take the initiative for the filing.
Take back control of your finances!
Get a FREE checklist for the money moves to make in the New Year.
Also get new articles, advice, and tips delivered right in your email inbox with our newsletter!
Though a group of your creditors can get together and file what is known as an involuntary Chapter 11 petition. This would be against a defaulting debtor.
Continuing Business Operations
In the majority of cases, you as the debtor will continue to operate your business as usual and be known as the “debtor in possession.”
However, if the bankruptcy court finds sufficient cause such as fraud, incompetence, gross mismanagement, or dishonesty relating to your affairs as the debtor, it can appoint a trustee to take over the business’s operations.
Chapter 11 Reorganization
You generally have four months to put forward a reorganization plan – effectively a restructuring of your business’s financial affairs – after filing for Chapter 11 reorganization. This can be extended if good cause is shown, but you need to show your creditors how you will operate and pay off your obligations in the future.
Chapter 11 reorganization is, effectively, a contract between you and your creditors that allows you to stay in business and get things organized so that your business has a future.
You may need to downsize some of your operations with Chapter 11 reorganization so that expenses are reduced and assets are freed up. But, there can be times when “liquidating plans” are put forward by creditors. With these liquidation plans, your company’s operations are shut down and the remaining assets, including property, are sold to meet at least some of what is owed to creditors.
There are occasions when a Chapter 11 reorganization plan will provide for immediate and full repayment of all your creditors, though that is rare. This is why a good lawyer can help you examine the options that are more suited to your circumstances.
As mentioned previously, the court can appoint a trustee if it considers it necessary. It’s worth looking at that option in terms of employing a specialist lawyer in the field such as Suzzanne Uhland. Her main focus as a lawyer is on restructuring and reorganizations under Chapter 11 reorganization.
She represents parties in Chapter 11 bankruptcy sales, reorganizations, and distress transactions. Working closely with her firm’s attorneys responsible for litigation and transactions relating to insolvency and bankruptcy cases, she also gives advice on matters relating to bankruptcy compliance.
Confirmation of the Reorganization Plan
When you apply for Chapter 11 reorganization and have put forward your reorganization plan, and it has to be approved. This is known as “confirmation.”
The confirmation rests with the bankruptcy court, and that court has to find that your plan meets a number of requirements. It means you have to be clear and realistic in what you are proposing.
The reorganization plan has to be feasible. Which means, that as far as the court is concerned, it should have a good chance of succeeding.
You will have to prove to the court that you can raise enough revenue over the term of the plan to meet your expenses. These include any payments to creditors.
You also have to convince the court that what you propose is in good faith and not in a way that is forbidden under the laws applied to it.
The best interests of creditors is also an important part of a plan being confirmed. Creditors should receive at least as much as they would under your proposed plan if your case were converted to a Chapter 7 liquidation.
The plan should also be “fair and equitable” so that creditors are paid, over a period of time, at least the value of the collateral they hold.
Moving Forward After Chapter 11 Bankruptcy
Chapter 11 is not necessarily a last resort, but it can be complicated, and there are both upsides and downsides to this. It can help you reorganize and restructure, but it is complex and not for every business. The best way to decide is to take professional advice and determine if it is right for you.
What about you? Have you had any experience with Chapter 11 reorganization and bankruptcy?