Business bankruptcy is a scary proposition for most owners. However, when money becomes tight, taking a close look at Chapter 11 reorganization bankruptcy might prove worthwhile. Without a doubt, many major corporations like American Airlines, Macy’s, General Motors, and Chrysler have all used Chapter 11 to reorganize their debt and continue.

Isn’t Chapter 11 Just for Big Business?

This is a common question that small business owners ask. The answer is that Chapter 11 is not just for big business. In fact, many small companies are turning to it to reorganize their debt.

What is Chapter 11?

Chapter 11 business bankruptcyChapter 11 is considered a form of bankruptcy and it is complex. In addition, the bankruptcy proceeding is the most expensive compared to other forms. The debtor’s debts, assets, and business affairs go through a reorganization. In most cases, the business owner chooses Chapter 11 because it gives them the time that they need to restructure all their debts and emerge with a fresh start. However, the debtor must fulfill all their obligations under a plan of reorganization. Any company must carefully analyze their unique situation and explore all possible options before embarking on Chapter 11.

Chapter 11 Eligibility

Any business (even an individual) has the option of filing a Chapter 11 bankruptcy. Businesses, whether a sole proprietorship or a corporation can choose to use Chapter 11. In most cases, when an individual uses Chapter 11 it is because their debts exceed the amount allowed under Chapter 13 ($419,275 for unsecured, noncontingent debt, and $1,257,850 for debts that are secured). However, please be aware that rates adjust every three years.

Understanding Chapter 11 Bankruptcy

The court assists the business in restructuring their debts and obligations during a Chapter 11 proceeding. Typically, the business will remain open and continue to operate. However, some businesses such as retailers do often close a portion of their stores or revamp to online only. However, in most cases, a business can and does stay afloat during a Chapter 11 bankruptcy.

On rare occasions, if the gross incompetence, dishonesty, or fraud occurs then the court will appoint a trustee who will run the company throughout the bankruptcy proceedings. In such instances, the company cannot make any decision without gaining approval from the courts. Also, all sale of assets and any expansion/stopping of business operations cannot be undertaken because the court has control. Also, the debtor cannot obtain a loan until after the bankruptcy is completed.

Here are a couple of key features of Chapter 11:

  • A reorganization plan is mandatory, and the laid-out plan must focus on the best interests of all the creditors involved.
  • The debtor should suggest a program but if they fail to do this then a creditor can make the proposal.

Considerations for Chapter 11

Chapter 11 is costly and complex. Exploring alternate routes before filing is always encouraged. During Chapter 11, the business or individual filing can propose or create/reorganize a plan. The plan might include such things as reduced expenses, potential downsizing, the possible liquidation of assets, and the renegotiation of all debts involved. If the court feels that the plan laid forth is feasible and acceptable for the creditors, then the court will accept the proposed plan and the bankruptcy will move forward.  

The Term ‘Debtor-in-Possession’

Once a Chapter 11 bankruptcy petition is filed, the business becomes a debtor-in-possession. This term simply means that the debtor still retains its property and can continue to operate. However, the debtor-in-possession does have the responsibilities (including rights) of a bankruptcy trustee without the right to any compensation. The debtor-in-possession still has the right to obtain loans, file lawsuits to stop the transfer of money to creditors and accept/reject contracts but everything must first undergo court approval. A creditor or the court can also opt to appoint a bankruptcy trustee to completely replace the debtor-in-possession if it is in the best interest of the creditors or the bankruptcy estate because of mismanagement.

Benefits of Business Bankruptcy

With Chapter 11, a business could undergo restructure and continue to operate.

Additional benefits of Chapter 11 include:

  • Business owner retains all property needed to continue business operations
  • Unneeded assets can be sold
  • Payment terms undergo modification on secured debts (such as property mortgage or business equipment loans)
  • Obligations are discharged (eliminated) if they cannot be paid over the plan term
  • Chapter 11 allows greater flexibility than Chapter 13
  • New contracts are formed between the debtor and creditors which may extend payment terms
  • The debtor does not need to turn over disposable income as trustee
  • An appointed trustee is an exception and rarely carried out unless fraud or gross mismanagement occurs.

If you feel Chapter 11 Bankruptcy may be the right move for your business contact our office to schedule a consultation with Attorney Gregory Oberhauser. 978-452-1116