For businesses facing huge debts, avoiding closure and liquidation of assets are made possible by filing for Chapter 11 bankruptcy, commonly known as business reorganization. Under this type of bankruptcy, a business may renegotiate the terms in its contracts and leases, request creditors to discharge debts, and restructure payment plans in order to reach profitability. Declaring corporate bankruptcy will give the debtors time to draft a repayment and reorganization plan.
The Chapter 11 Bankruptcy
There are different types of bankruptcy filings, and Chapter 11 is usually the one petitioned for by big corporations and small businesses who cannot pay off loans. Under the U.S. Bankruptcy Code, a small business, one with less than 500 employees, is considered a debtor when its business activities reach a total of not more than $2.19 million in debt at the time the petition was filed. Sometimes, in a bankruptcy petition where the court finds that the business only has a small chance to be profitable, the case is dismissed. The bankruptcy filing may then be changed to a Chapter 7 type.
Below is an overview on the bankruptcy process. It outlines five steps followed by corporations and small businesses that file for bankruptcy, specifically Chapter 11.
Step 1: Preparation of Court Filing Requirements
In a bankruptcy petition, a small business submits to the court the following paperwork: the most recent business balance sheet, the most recent federal income tax return, a statement of operations, and cash-flow statement. Unlike in cases involving larger entities, the bankruptcy court requires small businesses that file for Chapter 11 to submit a profitability report, projected cash receipts, and disbursements. Moreover, a U.S bankruptcy trustee is also appointed to the case.
Step 2: Filing of the Bankruptcy Petition
A bankruptcy protection may be petitioned by either the borrower (also referred to as debtor), or the lender (also referred to as creditor). Although the latter is unusual, when it occurs, it is generally referred to as an “involuntary petition”. This will start with the debtor looking into all bankruptcy options. Legal counsel from a bankruptcy lawyer may be sought before he decides on the type of bankruptcy to file for. The petition must then be submitted to the U.S. Bankruptcy Court.
Step 3: Court Issuance of Automatic Stay
In the beginning of the bankruptcy case, the court shall issue an automatic stay which will put all creditors’ collection activities on hold. This means that the business can expect not to receive any calls, demands to pay back debts, lawsuits, or harassment from the lender. While the court order is in effect, the debtor is expected to think about how to reorganize debts and repay loans while the business continues with its normal operations. At this stage, bankruptcy counseling may be sought.
Step 4: Drafting of the Business Repayment Plan
At this stage, the debtor negotiates with creditors for a more feasible payment of obligation. Under the restructuring, creditors are grouped into classes. Federal and State tax agencies will fall under first priority. On the other hand, employees whom the business owed wages, and stockholders with unpaid interests, will fall under another class. Secured and unsecured debts will also be placed in separate groupings.
Step 5: Confirmation of Reorganization
For a reorganization plan to be enforced, a meeting of creditors will be held before a judge. Each must provide a vote in favor of the restructuring. The debtor shall also review all creditors’ claims and may provide reasonable objections, before the court approves the final plan in a process called confirmation. The agreed upon repayment amount is usually lower than the original total amount owed. Moreover, all debts existing before the date of confirmation and were not included in the approved plan, shall be discharged. The bankruptcy court shall then supervise all business actions through its monthly progress reports, to ensure compliance with the terms of agreement and the bankruptcy laws of the state.
In sum, Chapter 11 bankruptcies give businesses facing insolvency the opportunity to save their assets and obtain some debt relief. Even if declaring a business bankrupt may incur high costs for legal fees or filing fees at the start of a hearing, these will soon be offset after bankruptcy protection is sought and the business becomes profitable. In any case, it will be best to discuss all available options with an experienced business bankruptcy attorney before filing for bankruptcy.
For financially struggling businesses in need of legal advice, contact me at Karina Lucid Law. I will help assess your business bankruptcy options and go through the legal process smoothly here in New Jersey. Call me now for more information and to schedule a free initial consultation.