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.
What is Chapter 11 Bankruptcy?
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 your doors. That is when having an outsider’s perspective - someone with no emotional attachment to the business - can be most valuable. Chapter 11 Bankruptcy was created as a method for small businesses facing difficult financial situations and remain a viable entity.
A Smithfield Chapter 11 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 small businesses. Some of those benefits include:
- operating your business while paying off debts,
- partially paying back unsecured debts,
- receiving an automatic stay judgement, which prevents your creditors from contacting you at work or at home, and
- restructuring debts to reduce your monthly payments and spread payments out over a period of time.
How Does Chapter 11 Bankruptcy Work?
Chapter 11 begins when you file a petition with your local bankruptcy court. Petitions for Chapter 11 bankruptcy can either be voluntary and filed by debtor, or involuntary filed by the debtor’s creditors.
If you choose to file voluntarily, you must also file with the court:
- a schedule of all of your assets and liabilities,
- a schedule of your current income and expenditures,
- a schedule of expired contracts and unexpired leases, and
- a statement of your financial affairs.
Chapter 11 is commonly used to reorganize businesses like corporations, partnerships or sole proprietorships.
In the case of a corporation, In a Chapter 11 bankruptcy case involving a corporation, the personal assets of its stockholders and owners are not at risk. 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.
By contrast, a sole proprietorship 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 the automatic stay. This will provide a period of time in which all judgements, collections, foreclosures and repossession activities are paused. During this stay, creditors cannot pursue a debt or a claim that was created prior to the Chapter 11 filing date.
The Role Of The Bankruptcy Court in Chapter 11
Under Chapter 11, your business can continue to operate, however, the bankruptcy court will assume control over major business decisions. For example, a bankruptcy court must approve operational decisions such as:
- Lease agreements for real or personal property
- A mortgage agreement and other secured financing arrangements
- Ending or expanding business operations
- Entering into, or modifying, contracts and agreements
Your secured creditors can support or oppose business decisions that require the bankruptcy court’s approval as well. In fact, 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 for Smithfield Businesses
If you choose to file Chapter 11, then you will have the right to create and propose a reorganization plan to the bankruptcy court. 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, your creditors’ 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:
- The business must show that it will be able to raise sufficient revenues to cover its expenses and payments to creditors
- 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
- The proposed plan must be fair and equitable, as determined by the court
- 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
Hire A Smithfield Chapter 11 Bankruptcy Attorney
We recognize that the closure of a business can be extremely difficult and affect all facets of your professional and personal life. 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 financial issues.
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. Contact David Mills at Narron Wenzel, P.A. today to schedule a consultation.