If you’ve recently found that your business is in serious financial trouble, you may be thinking about filing for bankruptcy. But if you’ve found this article, it’s unlikely you fully understand what is involved in doing so. First and foremost, it’s incredibly important for you to employ the services of a qualified bankruptcy attorney to make sure that everything is done in accordance with federal law.
Knowing where to start, however, is also very important. After all, there are several different ways for a business to declare bankruptcy under the United States Bankruptcy Code, including chapter 7, chapter 11, and chapter 13. Today, we wanted to help you understand the basics of your most flexible option in these circumstances — Chapter 11 Bankruptcy.
For starters, chapter 11 bankruptcy is, as its name implies, based on Chapter 11 of the U.S. Bankruptcy Code. This type of bankruptcy filing is typically used to reorganize a business such as a sole proprietorship, partnership, limited liability company (LLC) or corporation in order to keep the business open while creditors are paid off over time. In essences, the reorganization process is designed to make your business more efficient, allowing you to make pay off your debtors. Your business retains its assets and sets up a repayment plan with your creditors through the bankruptcy court.
During this process of reorganization, your company will generally restructure its finances using a plan that has been submitted to and approved by the bankruptcy court overseeing the bankruptcy process. These plans typically reduce financial obligations of the debtor company and may even modify payment terms with the creditors. This is done in order to allow your company to balance its income and expenses so that it can continue operating and regain its profitability.
Often, smaller businesses shy away from filing chapter 11 bankruptcy because the process can be relatively expensive, time-consuming, and complex compared to other types of bankruptcy proceeding. However, it does provide your company with the most flexibility in remaining open and operating during the bankruptcy proceedings. And, unlike chapter 13 bankruptcy, there are no eligibility requirement that must be met in order to file for chapter 11 bankruptcy.
As mentioned above, your business retains its assets and remains in operation during chapter 11 proceedings. Once your chapter 11 bankruptcy petition is filed, an automatic stay is put in place to protect your business. Then, your company must file a plan of reorganization and a written disclosure of its current financial situation including information about business affairs, assets, and liabilities. This disclosure statement is filed with the bankruptcy court and must be approved by the company’s creditors in order for the bankruptcy proceedings to move forward.
Once the disclosure statement is approved, the court can hold a confirmation hearing regarding the reorganization plan. If the plan is confirmed, the company — as debtor in possession — or a bankruptcy trustee runs the business in order to generate money that will be used to pay off the creditors. Unfortunately, during this time many companies end up reducing their labor force as part of the reorganization process.
Generally speaking, most companies that file chapter 11 bankruptcy do so in order to try to save their business. If the bankruptcy process is successful and the reorganization plan works as intended, it is often possible for your company to recover from this type of bankruptcy filing. Nevertheless, it is important to remember that filing for bankruptcy is a very serious process for any business and will typically have a variety of negative consequences — both direct and indirect.
For example, if your company has stock that is held publicly or privately, that stock will become virtually worthless during the bankruptcy proceedings and will often emerge at a far lower price point than it was at prior to the chapter 11 filing. Another common result of bankruptcy proceedings is a loss of trust on the part of your customers, clients, and employees. If this is the case, it can take years to rebuild your brand’s reputation to where it was before you filed for bankruptcy.