Chapter 11 Business Bankruptcy
Bankruptcy is a legal process that consists of federal rules and laws. This process offers financial solutions for businesses and individuals who owe more debt than they can pay. Therefore, they get a chance to get back on a healthy financial track. The majority of cases are filed under Chapter 7, Chapter 11, and Chapter 13 of the Bankruptcy Code.
Filing Chapter 11 allows businesses to remain open and in operation while repaying creditors over a set period.
Chapter 11 Bankruptcy Further Defined
Chapter 11 bankruptcy is known as “reorganization” that typically involves organizations, businesses, corporations, or partnerships with a great deal of debt. Small companies or individuals can also file. Chapter 11 gives businesses the time and opportunity to reorganize their debts through a plan of restructuring. This plan can provide the filer a fresh start.
The Plan of Restructuring
Within this plan, the debtor states how they endeavor to reorganize or liquidate their assets over time. Affected creditors may vote on this plan. If the court receives the necessary votes and the legal requirements are satisfied, they can confirm the plan. The debtor is also subject to fulfilling the terms of their obligations under their plan of reorganization.
There are several options available to debtors to restructure their business. For example, they can acquire loans under advantageous terms, giving new lenders priority on the organization’s earnings. They can also downsize to reduce expenses or renegotiate debts.
Chapter 11 Vs. Chapters 7 or 13
Chapter 7 Vs. Chapter 11
The entity that files under Chapter 11 doesn’t have to liquidate its assets and remains in control of its operations. It gives the business time to reorganize and to obtain a discharge of previous obligations. However, Congress does not let a corporation, limited liability company, or any other type of business organization obtain a discharge in Chapter 7. Rather, a business that files Chapter 7 is putting up the white flag of surrender.
Chapter 13 Vs. Chapter 11 (non-sub Chapter V)
Although Chapters 11 and 13 allow dismissing debts, they have different costs, eligibility, and completion times. Any entity can file Chapter 11 with no specific debt limit or required income. Chapter 13 can only be filed by an individual and not a business (inc., LLC, LP, etc.). Chapter 13 also has predetermined debt limits. Chapter 13 also involves having a trustee appointment that manages the distribution of income and potential liquidation of assets to creditors, where a standard voluntary Chapter 11 starts without a Trustee.
Advantages of Filing Chapter 11
One of the most significant advantages to filing Chapter 11 is that the debtor typically remains in possession (as a debtor-in-possession) of their business throughout the process and no Trustee. As a result, they may continue to operate the company and can, pending court approval, even borrow money. Therefore, they can continue to generate cash flow to assist in their repayment process.
The court also issues an order that will keep creditors at a distance. Creditors are often supportive of Chapter 11 because they stand a solid chance of recouping their money throughout the repayment plan or wish to renegotiate their debt.
Disadvantages of Filing Chapter 11
Filing for Chapter 11 can be a lengthy and expensive process. It’s one of the most complicated bankruptcy chapters and has substantial more costs (attorney’s fees, court costs, quarterly payments, etc.). Additionally, the bankruptcy court must approve the reorganization plan. This plan must be achievable so that the business can pay off its debts. Therefore, only after great thought and consideration should an organization pursue filing Chapter 11 bankruptcy.
It’s important to note that a business can’t make certain decisions without the approval of the courts, including:
- Sale of assets (other than inventory)
- Beginning or ending a rental agreement
- Ceasing or increasing business operations
Filing for Chapter 11 bankruptcy can provide organizations and individuals relief from their debt burdens while keeping them open for business. However, the process can be complicated, making legal counsel vital before filing the petition. Mummert Law has many years of experience handling bankruptcy cases for clients. Call today, and let’s see what course of action is best for you. Don’t go it alone when it comes to finding financial support for you or your business.