Bankruptcy: Chapter 11 Reorganizations - Overview

Businesses in dire financial trouble don't necessarily have to close up shop and go out of business. You may be able to save your business, keep operating and get financial relief at the same time. That's what a Chapter 11 bankruptcy is all about.

The basic idea is simple: It is better for everyone to let you keep operating and reorganize your business affairs than to simply liquidate a business. Learn some of the basics of Chapter 11 bankruptcies to see if you can use it to save your business.

Benefits of Reorganizations

If you can come up with a realistic plan showing how reorganizing your business affairs will get your business out of the red and into the black, Chapter 11 may be the answer. Everyone benefits. For instance:

  • You continue operating the business, which means workers stay employed and the public coffers keep a stream of income through taxes
  • Your business keeps its assets
  • You have a lot of control over how the business will run during and after the reorganization 

The Reorganization Process

When your business files for bankruptcy (the business is called the debtor in bankruptcy law jargon), the business's property becomes property of the bankruptcy estate. Any collection activities pending against the business are automatically stayed - they're stopped.

The automatic stay gives you and your creditors some time and breathing room. You can use, sell or lease the business's property. You can even look for financing to continue its operations. Of course, you have an obligation to protect your creditors' rights in the business and its property. You can't give the property away or sell it for ridiculously low prices, for instance.

What's the "Plan?"

You have the right to propose a reorganization plan for the first 120 days after the case is filed. The plan does many things, but it mainly sets out the details for repaying your creditors. For example, you may plan on repaying them from future earnings or with the proceeds from sales of business assets.

The bankruptcy trustee appointed to your case usually forms a committee of your creditors who vote on your plan. It may be confirmed or approved even if some creditors vote against it and even if some creditors are treated better than other creditors if bankruptcy wasn't filed.

The basic idea during the plan negotiation process is for you and most of your creditors to come up with a plan that has a realistic chance of success. In other words, one where most if not all of your creditors are repaid, at least some portion of your debts, and the business continues operations.

If the plan is confirmed - it takes court approval - you come out of the bankruptcy usually with much lower debts and a new "reorganized" business.

Protection for Creditors

Protecting creditors and making sure they're treated fairly is one of the goals in any bankruptcy. When it comes to Chapter 11:

  • Your creditors may ask the court to dismiss or throw out your case if they think it was filed in bad faith or think there's no chance of a successful reorganization plan
  • A trustee may be appointed if there's any indication you're mismanaging the business or wasting business assets
  • A secured creditor may be able to get relief from the automatic stay and continue collection efforts against loan collateral if it can prove to the court that the property value is at risk somehow
  • After your 120-day period expires, your creditors may propose their own reorganization plans, which may be much different than yours

Chapter 11 may be the answer you're looking for if it looks as though your business may go under. It's a complicated process, though, so be sure to talk to an attorney about whether or not it is the right choice for you and your business. 

Questions for Your Attorney

  • How many creditors have to approve a plan of reorganization?
  • What happens if my plan is approved and confirmed, but I'm later not able to hold up my end of the deal?
  • Will I be able to get rid of contracts that hinder the profitability of my business?
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