The Benefits Of Reorganization Under Chapter 11 For Businesses

David F. Mills
December 7, 2018

During the last financial crisis, our law firm saw many clients seeking to file bankruptcy as the final liquidation of their businesses. However, if these clients had been able to undergo Chapter 11 reorganization toward the beginning of the financial crisis, the complete failure of their businesses may have been avoided.

Chapter 11 bankruptcy was created as a method for businesses to survive through difficult financial times and remain a viable entity. The process is not always easy and requires difficult negotiations and procedural changes. If the businesses cannot be saved through Chapter 11, there are other legal solutions available that can help owners mitigate their financial loss and protect their assets.

Running a failing business is stressful. It may seem that any hope of turning things around is gone, and that the only thing left to do is close the business’s doors. That is when having an outsider’s perspective - someone with no emotional attachment to the business - can be most valuable. A bankruptcy attorney can provide that perspective by evaluating the business’s current condition and discussing all available options.

Advantages Of Filing Chapter 11 Bankruptcy

A bankruptcy case filed under Chapter 11 of the United States Bankruptcy Code is commonly called a “reorganization.” There are multiple benefits to Chapter 11 bankruptcy. For example:

  • You can continue to operate your business while paying off debts
  • You can partially pay back unsecured debts
  • Your business will benefit from an automatic stay judgement which will prevent creditors from contacting you at work or at home
  • You will be able to restructure debts to reduce your monthly payments and spread them out over a longer period of time

How Does Chapter 11 Bankruptcy For Businesses Work?

A Chapter 11 case begins when you file a petition with your local bankruptcy court. Petitions for Chapter 11 bankruptcy can either be voluntary (filed by debtor) or involuntary (filed by the debtor’s creditors).

When a debtor files voluntarily, he or she must also file with the court:

  • A schedule of all assets and liabilities
  • A schedule of current income and expenditures
  • A schedule of expired contracts and unexpired leases
  • A statement of financial affairs

Chapter 11 is typically used to reorganize a business, such as a corporation, partnership or sole proprietorship. In the case of a corporation, Chapter 11 bankruptcy does not put the personal assets of its stockholders and owners at risk other than the value of their investment in the company’s stock.

Partnerships are treated similarly. When a partnership files Chapter 11 bankruptcy, the partnership exists separately from its owners. However, the partners’ personal assets may be used to pay creditors. In some cases, the partners themselves may be forced to file for bankruptcy protection.

A sole proprietorship, on the other hand, is not separate from its owner. When a sole proprietor files Chapter 11 bankruptcy, the case involves both the business and personal assets of its owners.

Immediately after filing Chapter 11, the bankruptcy court will order an automatic stay. This will provide a period of time in which all judgements, collections, foreclosures and repossession activities are halted. During this time, creditors cannot pursue a debt or a claim that was created prior to the filing date.

Role Of The Bankruptcy Court in Chapter 11 Proceedings

While one benefit of Chapter 11 bankruptcy is that businesses can continue to operate, the bankruptcy court will assume control over major business decisions. For example, a bankruptcy court must approve operational decisions such as:

  1. Lease agreements for real or personal property
  2. A mortgage agreement and other secured financing arrangements
  3. Ending or expanding business operations
  4. Entering into, or modifying, contracts and agreements

Secured creditors can support or oppose business decisions that require the bankruptcy court’s approval. In making its decisions, the bankruptcy court will consider input from creditors. Unsecured creditors may also participate in the Chapter 11 process through a committee that is created to represent their interests.

Chapter 11 Reorganization Plans

In Chapter 11, the debtor has the right to propose a reorganization plan. The initial “exclusivity” period in which the debtor can create the reorganization plan proposal is four months after the filing date. When there is “good cause,” this exclusivity period can be extended up to 18 months. After this period expires, the creditors’ committee can propose a competing reorganization plan.

An approval of a proposed reorganization plan by the bankruptcy court is called a “confirmation.” Confirmation is granted when a plan has met a number of requirements, which include the following: 

  1. The business must show that it will be able to raise sufficient revenues to cover its expenses and payments to creditors
  2. The proposed plan must also be in the best interest of its creditors, meaning that creditors will receive at least as much under the proposed reorganization plan as they would through a Chapter 7 liquidation of the business
  3. The proposed plan must be fair and equitable, as determined by the court
  4. The court must also determine that the proposed plan proposed by the business was made in good faith and not designed to subvert the law

Working With A Chapter 11 Bankruptcy Attorney

Creating a Chapter 11 bankruptcy plan does not diminish the emotional component of owning a failing business. We recognize that the closure of a business can be a mental defeat that is difficult to accept. And the stress of that failure is not limited to the business itself; stress can affect all aspects of the business owner’s life.

Running a failing business is a deeply personal experience, and emotions may get in the way of clear thinking a good decision making. If your business  is experiencing financial difficulty, you need the advice of an experienced attorney who can evaluate your situation and provide a clear path to resolve your issue.

Dvid Mills has been serving North Carolina businesses and farmers for over 20 years, helping them through challenging financial periods. He is also a Board Certified Specialist in Business Bankruptcy Law. Call our office today to schedule a consultation with one of our bankruptcy attorneys.

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