It’s difficult to start a business, and it’s even more difficult to keep that business thriving. Small business owners and major corporations can benefit from Chapter 11 business bankruptcy if they happen to be drowning in unmanageable debt. A business bankruptcy attorney at O’Bryan Law Offices can help you save your business or escape the crushing weight of personal debt. Call us today at 502-400-4020 for a free consultation.
What is Chapter 11 Bankruptcy for Businesses?
Chapter 11 bankruptcy is also called “reorganization bankruptcy” because the process basically reorganizes a business’s debts, assets, and affairs while the business keeps its doors open. Chapter 11 is most commonly used by large businesses and corporations because long-term revenues will be greater than the assets’ liquidation value. Allowing a bankrupt business to reorganize and formulate a payment plan allows creditors to receive more money. The goal of Chapter 11 bankruptcy for businesses is to eventually make a profit once again.
How Does Chapter 11 Bankruptcy Work?
Before filing for Chapter 11 or any other chapter of bankruptcy, it’s important to know how the process works.
Every chapter of bankruptcy begins with an automatic stay which means that creditors can’t take action against a bankrupt person or business anymore. Automatic stays will temporarily prevent:
The Business Owner Will Become the Debtor in Possession
Unlike other chapters of bankruptcy, the business owner will continue controlling their business throughout the entire Chapter 11 process. Generally in other chapters of bankruptcy, a bankruptcy trustee controls any business or property. However, a bankrupt business owner will become the “debtor in possession” throughout Chapter 11.
One of the many benefits of Chapter 11 bankruptcy is that the business owner will receive debt relief through a payment plan. The creditors and the bankruptcy court must approve this payment plan. Most Chapter 11 payment plans involve reducing various business expenses and freeing up assets. In order for creditors and the court to approve a payment plan, it must meet several requirements.
Likelihood of success: The bankruptcy court will approve the bankrupt business’s payment plan only if it’s likely to succeed. Basically, the plan must allow the business to earn enough money in order to meet its financial obligations.
Creditors’ best interests: The Chapter 11 plan must also be in the best interests of its creditors. Basically, the “best interests” criteria demands that creditors receive at least as much under the Chapter 11 plan as they would under a Chapter 7 liquidation.
Good faith: The court must decide whether the bankruptcy attorney and the business owner prepared the Chapter 11 plan in good faith. Additionally, the plan must not violate the law.
Fair and equitable: In order for a Chapter 11 payment plan to be “fair and equitable,” it must:
Pay creditors at least the value of their properties and assets over the course of many months.
Ensure that the business owners don’t keep anything of monetary value, due to equity interests, until all of their other financial commitments are fully paid for.
Advantages of Chapter 11 Business Bankruptcy
Chapter 11 bankruptcy proceedings for businesses come with many advantages, including:
Extended payment plans: A payment plan between a bankrupt business and creditors can last as long as necessary. Payment plans are particularly beneficial to small business owners who require longer repayment terms on real estate or equipment loans.
Debt discharge time: Another benefit is that the court may discharge debt once it approves the payment plan if the plan calls for paying less than the total amount on a specific debt. But this won’t happen in a Chapter 11, Subchapter V case if the bankruptcy court approves the plan without consulting the creditors.
Debtor in possession: As stated previously, business owners can control their business during the bankruptcy process instead of a trustee controlling the business.
Disadvantages of Chapter 11 Business Bankruptcy
Chapter 11 bankruptcy proceedings for businesses also come with many disadvantages, including:
Loss of privacy: As with any chapter of bankruptcy, individuals and businesses must submit and fill out a plethora of documents. Naturally, these documents reveal a lot of information about an individual or a business. Additionally, these documents are available to anyone who wants to review court files. However, information such as Social Security numbers or various account numbers won’t be available to the public eye.
Detailed financial records: Similarly to the loss of privacy disadvantage is that a bankrupt business must keep and report meticulous financial records. These financial records could include mortgage or rental information, revenue reports, and more.
Some loss of control over business operations: As stated previously, one of the benefits of Chapter 11 bankruptcy is that the business owner can control their own business during the entire process. The exception to this advantage is that some business activities that are specifically related to bankruptcy need court approval.
What Decisions Does the Chapter 11 Bankruptcy Court Make?
Expanding on the last bullet point above: business owners do have a lot of control over their business and their bankruptcy case. However, the bankruptcy court must make some business decisions, including:
Signing into or not honoring a real or personal property lease
Shutting down or expanding on business operations if necessary
Property or asset sales
Any financial plans that allow the business to borrow money once the business files the Chapter 11 case
Signing into or modifying any major agreements with vendors, licensing, and more
Can Creditors Force a Business Into Bankruptcy?
In short: yes, creditors can undoubtedly file bankruptcy against a business. In order for creditors to do this, they must say which of the following two reasons justifies the involuntary bankruptcy proceeding:
The bankruptcy court will then decide whether the bankruptcy proceeding should continue and it will set a hearing date. If the business owner fails to respond to the involuntary bankruptcy proceeding, they will have to participate in it anyway.
The court will only order relief for a business owner in an involuntary bankruptcy if:
The business owner failed to pay their debts in a timely manner. The only exception is if disputes about liability or amount cause the debts.
An agent was appointed to a case and seized possession of nearly all of the business’s property within 120 days of the involuntary bankruptcy filing.
Why You Should Have a Business Bankruptcy Attorney
Individuals or businesses should never endure a bankruptcy proceeding without guidance. It’s crucial to have a business bankruptcy attorney on your side because of these reasons.
Formulating a Reorganization Plan
As with all aspects of bankruptcy, reorganization plans are confusing and overwhelming. Many business owners don’t know where to start. Generally, a business owner must submit a reorganization plan within 120 days from the date of the Chapter 11 filing and a business bankruptcy attorney can certainly help you do that.
Treatment Methods and Provisions
A business bankruptcy attorney will provide provisions and treatment methods. In order to receive treatment under the reorganization, a Chapter 11 plan must specify classes of rights and interests. Generally, a reorganization plan will classify claim holders as:
Additionally, for each claim in a class (including all impaired classes) the plan must include a means of treatment. An attorney will determine the treatment by a number of elements including the claim’s type, the debtor’s worth, and the value available for distribution to stakeholders.
Method of Implementation
In the reorganization plan, a Chapter 11 attorney must also lay out exactly how a business will receive debt relief. Every business and bankruptcy case is different, however the plan may include things like:
A business owner will keep a portion of the estate property
Some assets or money will be merged or consolidated
A specific lien might be modified
An outstanding security’s interest rate may change
Attorneys must only include terms consistent with the interests of creditors, equity security holders, and public policy in the reorganization plan.
Call a Business Bankruptcy Attorney at O’Bryan Law Offices
If you feel like you’re drowning in personal or business debt, you’re not out of options. There are options available to you, including filing for Chapter 11 bankruptcy. O’Bryan Law Offices is a debt relief agency that helps people and businesses receive relief under the Bankruptcy Code. For dependable advice about business bankruptcy options for small business owners, contact an experienced business bankruptcy attorney at O’Bryan Law Offices for a free consultation.