5 Tips to Understand a Chapter 11 Bankruptcy Filing

Chapter 11 bankruptcy is primarily used for business owners who want to restructure their debts while trying to become profitable again. The type of business can be a limited liability partnership, corporation or sole proprietorship. The business owner can still remain in control of the company as a “debtor in possession” until the reorganization plan is confirmed, the case is dismissed or converted to a Chapter 7 bankruptcy.

Overview of Chapter 11 for Business Owners

Business owners who need to reorganize their assets and debts often file under Chapter 11 and expect to return to normal business operations at some point in the future. An overview of how the process work is outlined below:

• The Automatic Stay—Once a bankruptcy petition is filed in Federal Court, the business owner is protected by the “automatic stay”. This means that the creditors are prohibited from taking any action against the debtor.

• The Creditors’ Committee—The United States Trustee is responsible for appointing a Creditors’ Committee to represent the debtor’s unsecured creditors. At the first meeting of the creditor’s, also known as the “341 Meeting”, the debtor is required to appear and answer questions, under oath, from the creditors. The U.S. Trustee presides over this meeting where the liabilities, assets and the financial condition of the business are examined. Committee members have a fiduciary responsibility to the creditors and must carry out their duties in an honest and unbiased manner. In cases involving a small business owner, appointing a creditors’ committee is not a requirement.

• The Reorganization Plan—The business owner has 120 days to come up with a plan for reorganization. The plan must designate the different classes and interest of each party, such as secured creditors, employees and investors. The plan must be approved by the majority of all classes and the bankruptcy court must confirm the proposed plan. The bankruptcy court can approve the debtor’s plan even if one of the classes of creditors object, which is known as a “cram down”.

• Asset Liquidation—Debtors may choose to file for liquidation under Chapter 11, which is more economically advantageous than a Chapter 7 liquidation bankruptcy.

• Discharge of Debts—Once the reorganization plan is confirmed, all debts that occurred before that date will be discharged. The debtor must make all of the repayments to the creditors as outlined in the plan.

The only major disadvantage in filing Chapter 11 is that it’s expensive in terms of overall litigation costs and the amount of time it takes to complete is a lengthy process. Therefore, this choice is best for large corporations rather than small businesses.

Consulting a Business Bankruptcy Attorney

When a business is floundering and crippled by a large amount of debt, they may think that filing for bankruptcy is their only solution. There may be other alternatives that include finding way to cut costs or obtaining new vendors who can supply the same inventory at a cheaper cost. Before making any final decision, you should consult with a bankruptcy attorney to examine the specifics regarding your situation.