Chapter 11 Bankruptcy

Chapter 11 bankruptcy usually involves a financially-struggling business attempting to reorganize its debts to return to profitability. Generally, companies that file for Chapter 11 seek debt relief as part of a new business plan. After going through bankruptcy, any included debts are discharged.

Chapter 11 bankruptcy proceedings can be complex. If you want to know if Chapter 11 is the right option for your small business, talk to a local business bankruptcy attorney for legal advice.

What Is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is often used by corporations, partnerships, and limited liability companies (LLCs) to restructure their debt.

In limited situations, individuals can also file for Chapter 11 bankruptcy if they meet the requirements. However, most Chapter 11 cases are filed by corporations and small businesses.

Either the debtor or their creditors can file an official bankruptcy petition for Chapter 11 relief. The goal of Chapter 11 bankruptcy is to make the business profitable again. Chapter 11 seeks to restructure debts rather than the all-out liquidation of assets under a Chapter 7 bankruptcy.

Once a company files the petition, it is referred to as the debtor-in-possession and will usually continue to run the day-to-day business operations. There is an automatic stay against debt collection actions after the bankruptcy filing. Debtors have at least four months and potentially up to 18 months to propose a reorganization plan. If the creditors and other parties are unhappy with the proposed plan, they can move to convert the Chapter 11 to a Chapter 7.

The reorganization plan addresses how secured and unsecured creditors will be repaid and the future operation of the company. Getting the plan approved means either reaching an agreement with the various parties (creditors, shareholders, etc.) or acceptance by the bankruptcy court if it meets various requirements. Failing to follow the terms of the repayment plan may mean going back to court or having your case converted to liquidation under Chapter 7.

How Long Does Chapter 11 Take?

Chapter 11 cases typically average between six months to two years. There is no definitive amount of time for Chapter 11. The duration of a Chapter 11 case will depend heavily on several factors.

Usually, the shortest Chapter 11 cases involve either total liquidation of assets or agreement among the various committees on the reorganization plan. The longest Chapter 11 may involve drawn-out negotiations, meetings, and hearings among the parties.

What Is the Difference Between Chapter 11 and Chapter 7?

Chapter 7 shuts down the business and sells all the assets to repay creditors. Companies in Chapter 11 restructure their debt obligations and chart a course for success post-bankruptcy.

The bankruptcy trustee’s role in Chapter 7 is much more prominent than in Chapter 11. A trustee will only be assigned in a Chapter 11 case in specific circumstances. The courts also charge higher fees in a Chapter 11 case compared to a Chapter 7 liquidation.

Filing the Chapter 11 Petition

A Chapter 11 bankruptcy case begins with filing the petition for debt relief.

Business entities can either file the petition with the court that serves their primary place of business or their place of incorporation. For example, a company might be incorporated in Delaware but have its corporate headquarters in New York.

The petition should include the following documents:

• Accounting of assets and liabilities
• Current income and expenditures
• Executory contracts and unexpired leases
• Statement of financial affairs

A written disclosure statement containing information regarding business affairs, assets, and liabilities, along with a proposed reorganization plan, is usually submitted to the court along with the forms and fees.

Chapter 11 Reorganization Plan

The reorganization plan is the core of a Chapter 11 case. This plan outlines how the business intends to operate as a going concern and how creditors will be repaid.

Usually, the plan involves some corporate restructuring, downsizing, reduction of expenses, and/or sale of some assets. Sometimes, a Chapter 11 plan will call for the closure of the business and the sale of all the debtor’s assets. Typically, companies going into Chapter 11 will already have been in discussions with creditors before the court filing.

Companies have the exclusive right to propose a reorganization plan for the first four months after filing for Chapter 11. They can ask the court to extend this up to 18 months. After that, other parties, such as creditors, may submit competing plans.

Classes in Chapter 11 can include creditors (unsecured and secured creditors), shareholders, employees, and others. If the company can convince all the classes to agree on its proposed plan, the approval of the plan is usually very quick.

With the court’s approval, the company can also force the plan through without consensus via special provisions known as “cram down.” To qualify for a cram down, the company will need to demonstrate to the court that its plan is fair and equitable, in the best interests of the creditors, in accordance with the law, and in good faith.

Chapter 11 for Small Businesses

Many Chapter 11 cases are filed by small business owners. There are special provisions in bankruptcy law for small businesses. With more oversight by the U.S. trustee, small business debtors will need to make ongoing filings with the court throughout the Chapter 11 bankruptcy process concerning profitability and projected cash flow.

Small businesses must also demonstrate compliance with the Bankruptcy Code and prove that all applicable taxes are paid and tax returns filed. Bankruptcy courts in small business cases can waive the appointment of creditors’ committees, reducing the financial burden on small business debtors.

Get an Attorney’s Help

A Chapter 11 bankruptcy filing is a complex undertaking, with many potential pitfalls for your business along the way. Working with experienced business bankruptcy lawyers is essential. An experienced bankruptcy lawyer will know how to help you think through a reorganization plan and handle negotiations with creditors and the court.