September 20, 2019

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Filing a Chapter 11

Chapter 11 Business Bankruptcy

A Chapter 11 Bankruptcy can be expensive in time, money and energy. Any business ought to consider the legal expenses and the time necessary to reorganize prior to filing a Chapter 11.

There are benefits to filing Chapter 11 if your business is struggling financially. These benefits include:

  • Continued operations
  • The automatic stay
  • Lowered and rescheduled payments to creditors
  • Ability to rework contracts that are traditionally protected by state law

A Chapter 11 may not be the best choice if:

  • Your business is in so much debt that restructuring does not make sense
  • Management does not have the time to participate in the complex reorganization process
  • Your business does not have funds to pay for the required legal representation

Planning Ahead

You may ask how a company that cannot meet its financial obligations can afford to pay a business bankruptcy lawyer. The key is to plan ahead. If you know your company may need to file bankruptcy, you may have to use money planned to pay your creditors to pay a business bankruptcy law firm instead. The goal of paying off your debts and a fresh start may ultimately be better served by filing for bankruptcy with a lawyer than if the business was to fall all the way under.

The Goals of a Chapter 11 Business Bankruptcy

  • To resuscitate your business and allow continued operations through a plan of reorganization.
  • To rehabilitate your business back into profitability so debts may be repaid by the new generation of revenue.

The Chapter 11 Business Reorganization Plan

The reorganization plan must include a list of creditors and a schedule of payments that is manageable for the company. Business debt may be reduced, rescheduled, or sometimes eliminated through the repayment plan. Generally, a Chapter 11 creditor must receive the amount it would have received in a Chapter 7 liquidation, or more.

You reorganization plan must be approved by the bankruptcy court in order for the business to proceed with a Chapter 11 filing.

What is an Automatic Stay?

Immediately upon filing a bankruptcy petition your business will be protected from creditors through what is called an “automatic stay.” The stay prohibits creditors from taking any collection action against your business (phone calls, letters, etc.). The purpose of the automatic stay is to give the business space to determine a plan on how to get ahead with its financial debts.

Qualifying Business Types

Corporations, LLCs, and partnerships can file for business bankruptcy. It makes no difference whether you are an “S” Corporation or “C” corporation.  Those distinctions are simply for tax purposes and do not affect a business bankruptcy proceeding.

A sole proprietorship is not a business for business bankruptcy purposes and cannot file a Chapter 11 bankruptcy. Most sole proprietorships file a Chapter 13 personal bankruptcy.

In Sum…

Filing a Chapter 11 bankruptcy is a large decision that can affect the course of your business and your business’s credit for seven years. The decision should be considered thoroughly with the counsel of an experienced business bankruptcy law firm.