Chapter 11 of the Bankruptcy Code helps business owners who are in deep financial crisis by allowing them to continue running and potentially save their businesses. The principle behind Chapter 11 bankruptcy reorganization is that it is better for all parties when a business is reorganized rather than liquidated.
How Chapter 11 Reorganization Can Help
Chapter 11 bankruptcy requires a business owner to provide the court and creditors with a realistic business plan showing how reorganizing the business will reasonably improve its financial condition and pull it out of bankruptcy. If this can be accomplished:
- the business owner retains the business and doesn’t lose primary control of its operation
- the business continues to run as it has in the past and employees are retained
- the business doesn’t lose its assets
- as opposed to Chapter 13 bankruptcy, Chapter 11 reorganization has no debt limit
How Chapter 11 Reorganization Works
When a company files for bankruptcy, it is referred to as “debtor.” The assets owned by the business become the property of the “bankruptcy estate.” An “order of relief” is issued by the court and an “automatic stay” is placed on any collection activity pending on the business. The stay allows the business owner a chance to recover from financial crisis and buy some time to find ways to pay off business debts. The business owner can use, sell or lease the business property. The company can also find lenders who may help by extending financing to repay pending debt. Whatever means is adopted to recover losses, creditors’ rights in the business and its assets must be respected. Business property cannot be given away or sold for an unusually low price to friends or business associates in anticipation that the end of the company is near and inevitable.
The Chapter 11 Reorganization Plan
The reorganization plan created by the debtor must show how the business is expected to generate sufficient income to recover losses and a schedule for the repayment of pending debt. The debtor has 120 days filing the bankruptcy court’s order of relief is issued to create and file the reorganization plan with the bankruptcy court. If (i) the debtor fails to submit the reorganization plan during the 120 day time period, or (ii) if the creditors fail to agree to the debtor's plan within the first 180 days, any of the creditors can submit a plan. Small businesses with debts of less than $2 million who file for Chapter 11 bankruptcy may be “fast tracked” and be required to provide a reorganization plan within 100 days (and creditors must approve within 160 days.) If the repayment plan is approved, it is then subject to “ratification” or approval of the bankruptcy court.
Protection Provided to Bankruptcy Creditors
While Chapter 11 bankruptcy provides a second chance to a struggling business, it also ensures that the interest of creditors is protected in the following manner:
- Chapter 11 creditors have the right to request that the court to dismiss the case if they believe that it was not filed in good faith or doubt the success of the reorganization plan.
- A trustee may be appointed by the bankruptcy court, even immediately after the filing, if there’s an indication that the business owners are mismanaging the business or wasting the assets.
- A secured creditor may get relief from the automatic stay and continue his collection activity against the loan collateral if he can prove to the court that the property value is at risk.
- If a satisfactory reorganization plan is not set forth by the debtor or is not accepted by the creditors, the bankruptcy creditors can propose their own reorganization plan which may be drastically different from the one the debtor proposed.
Do You Need a Bankruptcy Lawyer?
While Chapter 11 bankruptcy reorganization might be an answer to the financial problems of your business, bankruptcy laws and options are complicated. It is also a critical decision due to potential long term effects, such as on credit history. In many instances it makes for good business sense to first consult with a bankruptcy attorney to determine whether Chapter 11 bankruptcy is the right option for you or another direction may be more appropriate.
- Bankruptcy & Debt:
Chapter 11 Chapter 11 Bankruptcy Reorganization: How It Works
By Michael Wechsler |
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