Bankruptcy Under Chapter 11

Companies in financial difficulty often file Chapter 11 bankruptcy. It helps to restructure the company’s debts and creates a reasonable plan for reorganization or repayment.

Eligibility for Chapter 11 and Basics

Large businesses are most likely to use Chapter 11 bankruptcy. However, small businesses (and, in some cases, individuals) can still be eligible.

In contrast to other Chapters, the 11th Chapter

Businesses that realize they must declare bankruptcy may opt to shut down and cease operations rather than continue functioning.

Chapter 12 bankruptcy is a less-known type of bankruptcy. This is often used by family farmers and fishers.

Chapter 7 and Chapter 13 bankruptcy may be an option if you don’t have a business. These are the most common types of bankruptcy filings for people or businesses in certain situations.

What is a Chapter 11 bankruptcy, and how does it work?

Chapter 11 bankruptcy allows companies with significant debt loads to use reorganization. The United States Bankruptcy Code Chapter 11 protection allows companies to engage with creditors to restructure and reorganize debts.

After bankruptcy, the company submits a plan of action, which could include: 

  • Lowering expenses
  • Identifying new revenue sources 
  • Temporarily deferring payments to creditors 
  • Profitable ideas

Chapter 11 Bankruptcy Benefits

Chapter 11 bankruptcy reorganization has many advantages. 

  • Avoids liquidation of the entire business (the company can continue to operate)
  • Allows you to prepare and submit a plan
  • This tool allows you to organize things that aren’t working 
  • Maintain control over your company

Chapter 11 bankruptcy is more expensive than other types and takes longer.

Chapter 11 Eligibility: Creditors vs. Owners

Either the insolvent owner of the business or its creditors can file Chapter 11 bankruptcy. If creditors choose to file, it’s called an “involuntary bankruptcy petition.”

The bankruptcy petition is filed by the company, not the petitioner.

How to file a Chapter 11 petition

The petition process can be initiated with or without legal assistance. The debtor will then begin to work on its restructuring plan.

The bankruptcy court will accept a reorganization plan if it:

  • Has been developed and constructed in good faith. This means that the plan was created with integrity and noble intentions. The court will review all documents in your case to determine if you acted in good faith.
  • All applicable laws, local laws, and court orders are followed.

After the authorization of the plan, the court will ratify it. All debts that were not directly addressed in the plan’s confirmation date may be forgiven. The business must pay all remaining creditors after the restructuring plan is approved.

Some debts can be forgiven or renegotiated to make them less costly. The payback plan amount may be lower than the original loan.

The debtor must: 

  • Examine each claim of the creditor
  • Make objections if necessary.
  • To keep the court informed about your progress, you should submit regular operational reports.

The company can resume normal operations after the petition has been filed. As they continue uninterrupted, the bankruptcy court will supervise the debtor and establish a repayment program.

Filing and Administrative Fees (Chapter 11).

You will need to pay $571 to file a Chapter 11 bankruptcy filing in 2020. This is considered a service fee.

If you wish to split a case (e.g., two companies filing separately), an additional $571 will be charged. To file a new motion in split cases, you will be charged $1.167. A $1,167 fee is charged to reopen a case after it has been dismissed.

The following information must be provided when you file Chapter 11:

Small businesses must file the following paperwork with the court:

The most recent financial statements

  • Most recent balance sheet
  • Statement of operations 
  • Cash flow statement 
  • Most recent federal income tax return 

The bankruptcy court will examine Chapter 11 filings by smaller companies more closely than those of larger corporations. Businesses are required to report on their financial performance and expected financial collections and disbursements. These cases are also handled by the United States bankruptcy trustees.

Reorganization Plan 101 (Chapter 11)

Chapter 7 does not discharge debts. Chapter 11 bankruptcy protection allows businesses the opportunity to re-enter their markets.

To achieve this goal, the company will first renegotiate leases and contracts and then get all or part of its debts forgiven.

Creditors will be motivated to work with the company owners, accept lower loan payments, and make concessions. It is possible to do this since a Chapter 7 bankruptcy case will not result in better terms and more money.

Creditors will be divided according to how they claim to be treated in a restructuring plan. 

  • Federal and state tax authorities are two of the first to be repaid.
  • Wages due to employees
  • Stockholders

Secured creditors are assigned to their classes, while unsecured claims are combined. The court must approve a restructuring plan, and creditors must vote on it. The plan could change the terms or amount creditors receive to repay debts. ,

The “Automatic Stay”

Automatic Stay is a feature that lets you stay still while not having to move.

All collection activities will be stopped automatically when a petition has been filed unless otherwise ordered by the court. You will be free to focus on your reorganization, and creditors and collection agencies won’t contact you.

Additional debt can be taken out of bankruptcy. The automatic stay does not stop or dismiss new debt.

Chapter 11 is for small businesses

While Chapter 11 bankruptcy restructuring is often associated with larger companies, it can also be available to smaller firms that meet certain criteria.

According to the Small Business Administration, “small businesses” are those with fewer than 500 employees. The majority of Chapter 11 filings are made by small businesses. However, they don’t always stay in Chapter 11.

A small company Bankruptcies under Chapter 11 are frequently rejected and moved to Chapter 7. When the court finds that the company is unlikely to be profitable, it will often reject Chapter 11 bankruptcy petitions. If partners believe they can sustain and make a profit on their own, they may petition Chapter 11 for bankruptcy protection.

According to the United States Bankruptcy code, a “small business debtor” is someone who has total obligations of less than $2,725,625 at the time of filing.

Subchapter V: Fast-Paced Small Business Bankruptcy

In February 2020, the Small Company Reorganization Act of 2019(SBRA) created subchapter V to help small business owners. This could be a benefit to business owners who are dealing with the aftermath.

This method uses a private bankruptcy trustee who will assist you in developing and accepting a consensual reorganization plan. It is faster and cheaper than traditional Chapter 11.

You may be eligible for this option if you meet the Chapter 11 requirements.

  • Approve status conferences held by the courts within the first 60 days of your case. 
  • You must submit a status report 14 days before their meeting. 
  • Then, file the reorganization plan within 90 days of filing bankruptcy.
  • You can file quickly in terms of paperwork and time. 
  • Otherwise, you will have to go through the usual Chapter 11 process.

If you are looking for:

  • Private trustee assistance in the creation of bankruptcy plans
  • Avoid quarterly trustee fees 
  • More control over your restructuring negotiations

This subchapter contains additional standards and details. It is important to find out more or talk to your bankruptcy attorney.

Debtors who have a single real estate asset (SARE).

Chapter 11 may be available for real estate owners who own a small business. This is usually for office buildings, warehouses, and retail centers.

This is Chapter 11, and it’s called “single asset estate cases.” It applies to creditors who do not own residential property and have less than four units contributing almost all of the debtors’ income.

Real estate owners and operators are not eligible.

Chapter 11 Bankruptcy: Small Business Advantages

You should consider Chapter 11 if you own a small business.

Chapter 11 gives small companies more time to prepare a plan and submit it. They can also renegotiate terms with creditors (180 days versus Chapter 7). However, it does have some disadvantages.

A struggling company may find it difficult to pay its legal costs.

If the company emerges from bankruptcy protection with a clean slate, these expenses will be offset by the potential profit of being profitable. It’s a smart idea to speak to a knowledgeable company bankruptcy attorney before you make a decision.

Individuals’ Chapter 11 – Rare Cases

Companies were the original target audience for Chapter 11 bankruptcy restructuring. According to Toibb v. Radloff, 1991 U.S. Supreme Court, individual customers can also be entitled.

This is not common. This is very rare.

An example of a Chapter 11 bankruptcy filing is a celebrity who made poor investments and went bankrupt. For example, they may still be able to make money through product endorsements.

Because Chapter 11 allows you to “cram down” certain types of debts, it is considered more debtor-friendly than other types of bankruptcy. This means that the court will force through a plan to address certain creditors’ concerns.

An attorney can help you learn more about Chapter 11

It can be stressful to be in debt. However, bankruptcy might be an option to help you out. For the safety of your company, a Chapter 11 bankruptcy petition might be necessary. Nearly all of the steps will require outside assistance. It is not a good idea for you to do this alone.

An expert bankruptcy attorney can help you understand your options based on your particular circumstances if you consider filing bankruptcy.

 

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