All About Chapter 11 Bankruptcy

(US commercial law regarding Chapter 11 Bankruptcy). Sometimes a business may have a reasonable chance for future success, but because of overwhelming start-up costs, excessive current debt, numerous lease payments, or any other number of debt issues, the company may be in immediate danger of failure. In these cases, a Chapter 11 bankruptcy petition may be the solution. Through an involved and sometimes complicated process, a new business is actually created while the debts of the existing business are restructured and/or eventually liquidated. Many think that the word bankruptcy means only a liquidation of assets, but this is not always true. While a Chapter 7 bankruptcy petition filing does mean the end of a business, Chapter 11 can signal a new beginning.

The Differences

Companies that need protection from creditors can either file Chapter 7 or Chapter 11. Chapter 7 is a liquidation process that involves the sale of company assets to pay creditors. Typically, a Chapter 7 filing will entail a complete business shutdown. Chapter 7 is an admission of defeat, as the owners of the troubled business have most likely exhausted all available means for survival.

Certain companies, however, visualize a bright future if they can somehow get past current financial troubles. They may have strong sales, but can be overburdened by unreasonable obligations. If they have missed key loan payment dates, or if they owe large amounts of taxes, creditors and government agencies may be lurking at the door and threatening to seize assets. Chapter 11 can immediately stop the adverse actions of creditors while it allows troubled businesses to formulate a plan for the future.

The Process

When Chapter 11 is filed, all company assets are frozen and creditors are prohibited from attempting to collect debts. The old company actually ceases to exist and a new one is formed and operated by a person or entity called the debtor-in-possession. The new company continues operations, and customers may not even notice any difference in services or products offered. Note that most major U.S. airlines have declared Chapter 11 at least once, and customers have rarely had to deal with any service interruptions.

The Plan

The bankruptcy court will give the debtor-in-possession a period in which to formulate a plan to pay the past creditors and ensure that current vendors are paid going forward. Many vendors know that while they may receive only pennies on the dollar for past invoices, it may be more important to write and collect upon new business, so they are many times apt to accept a negotiated amount for old debts.

Creditors Committee

Anyone who is owed money can become a part of the creditor’s committee. This group will analyze and ultimately approve the survival plan offered by the debtor-in-possession. This process commonly involves intense negotiations.

Emergence

Once a plan to pay creditors is approved by the committee, it goes to the bankruptcy court for review. If the court agrees, old debts will be paid or even discharged and the company will emerge from its debtor-in-possession status and begin to operate normally.

Chapter 11 can be an excellent way to save a troubled business. It is not an inexpensive process, however, so businesses in trouble must accumulate enough money to pay the legal expenses involved in a Chapter 11 filing. Since the procedure is complicated, it’s generally not a do-it-yourself process, and adequate legal counsel should be retained.

About the author

This piece was composed by Tyler Franklin, a freelance blogger and writer who concentrates his efforts on financial, taxation, business, commercial and legal topics; those seeking advice on taxation issues should view the resources available here http://www.rgbrenner.com/.