If your company is in the red and you are worried about creditors, fret not. There is a viable option to make the bankruptcy process easier to manage. One of the best available options is a pre-packaged bankruptcy.

Pre-packaged bankruptcy is an alternative for companies considering bankruptcy. Throughout this procedure, creditor support is prepared for the company’s bankruptcy plan prior to filing for bankruptcy. The reorganization plan is created with the involvement of the creditors chosen by the company and elected by the shareholders before the initiation of bankruptcy proceedings. This can be an extremely effective alternative because there is “pre-agreement” for every little thing. Therefore, the result is faster bankruptcy proceedings.

If bankruptcy is a consideration, consult with a New Jersey bankruptcy attorney to guide you on the best steps for your company. Most likely, the attorney will suggest either a pre-packaged bankruptcy or standard timeline bankruptcy. Regardless of what you choose, you will probably opt for Chapter 11 bankruptcy for your business.

What is Chapter 11 Bankruptcy?

Under Chapter 11 bankruptcy, the company or individual undertakes a reorganization to pay for its debts, restructure earnings and expenses while reclaiming revenues. Corporations, limited liability companies or partnerships can continue operating their business during the bankruptcy process.

Who is in charge of my company once I file Chapter 11 bankruptcy?

A debtor in possession (DIP) is a person or corporation that has filed for Chapter 11 bankruptcy protection. The DIP is still in control of the business or property. This holds true even if the creditor has the legal rights to it under a lien or other security interest. The DIP can continue business operations in the best interest of the creditors. However, a DIP may only operate within the regular scope of business activities. Otherwise, the court must approve any actions that go beyond the ordinary course of business. The DIP must also keep precise financial records, insure any property and file appropriate tax returns.

What are the steps of  Chapter 11 Bankruptcy?

Using a Chapter 11 bankruptcy to reorganize your or your company’s finances can be a complex, lengthy process. As such, the use of a bankruptcy attorney is a good idea. Following is the typical process of Chapter 11 bankruptcy:

Preparing your Chapter 11 Petition

You will need to complete a list of all of your (or your company’s) assets, debts, income, and expenses. Also need is a summary of your financial affairs. You must make sure that everything is accurate. As soon as your documents are in order, you may now file your petition with the bankruptcy clerk’s office. In most cases, the filing of the petition triggers the automatic stay. The automatic stay prohibits collection efforts by creditors unless permitted by the bankruptcy court.

Filing Your Monthly Operating Reports

You must prepare and file monthly operating reports with the bankruptcy court during the entire duration of your case. Your reports will show your monthly income and expenses. These reports are accessible to your creditors, the bankruptcy court, and the trustee. This is so that they may evaluate if your proposed reorganization plan is doable. Some debtors find it easier to go about these reports if they seek the assistance of an accountant, with the permission of the court.

Attending the Initial Debtor Interview and Meeting of Creditors

You must attend an initial debtor interview where the trustee will obtain information about your case. In turn, the trustee will make sure that you have a clear understanding of your responsibilities.

After this interview, you will have to attend a 341 meeting with your creditors. In this public hearing, you will need to answer questions under oath. Your creditors will ask you about your bankruptcy petition. This meeting takes place about 20-40 days after you filed your Chapter 11 bankruptcy case. The meeting usually lasts one to two hours for Chapter 11 cases.

Filing a Disclosure Statement

You will need to file a disclosure statement together with a proposed reorganization plan. All parties, including your creditors, receive the disclosure statement and plan. The disclosure statement contains details about the state of your finances. It also explains the rights of your creditors and how they may participate in the bankruptcy allowing them the opportunity to evaluate your plans and decide whether or not they will accept your plans.

Attending the Disclosure Hearing

The bankruptcy court schedules a hearing after the filing of the disclosure statement by the debtor. The court will approve or reject it at the hearing. Usually, until the disclosure statement is approved, the reorganization plan will neither be accepted nor rejected by the judge.

There will be a hearing for the disclosure statement where parties can object to the statement’s language. More often than not, disclosure statements are approved on a regular basis. Hence, hearing is just a formality.

Proposing Your Plan of Reorganization

A Chapter 11 plan of reorganization states how the claims for each class of creditors will be treated. There are several classes of creditors:

1) Secured creditors – debt backed by collateral
2) Priority unsecured creditors – debt not backed by any collateral. Payment before nonpriority debt holders
3) General unsecured creditors – debt not backed by any collateral. Payment after priority unsecured creditors, and
4) Equity security holders – hold equity security of the debtor such as a shareholder interest.

If a creditor is not amenable to how they are treated in your plan, you can file a motion asking the judge to force the creditor to accept the plan. Otherwise called a “cramdown”.

Getting Reorganization Plan Approval at the Confirmation Hearing

At your confirmation hearing, you will ask the judge to approve your plan of reorganization. The judge won’t approve your plan if you have not achieved votes of acceptance from all of your creditor classes. In the event of disapproval of a creditor class, you can file a motion for cram down of the non-accepting classes. The court will then reschedule the confirmation hearing. Failure of the non-accepting creditor class to respond to the motion will be considered acceptance of your proposed plan. Otherwise, you can negotiate with the creditor to try to get it to accept the plan treatment. If you and the creditor still cannot come to an agreement, the judge will decide at the hearing.

Paying the Creditors

After the judge’s approval of your reorganization plan, you must start payment to creditors according to the approved plan. The plan is now the new contract. You are to strictly adhere to the stipulations of the new contract you entered into with your creditors. Failure to pay on time may result in a possible lawsuit.

Depending on what type of debts you reorganized through the bankruptcy, these payments may go on for many years. Debts, like mortgages or car notes, typically are re-amortized over an extended period.

Crossing the Finish Line: Discharging of Debts

The main objective of filing Chapter 11 bankruptcy is to discharge debts. The discharge is granted once all debts to your unsecured creditor class have been paid. Once all required payments have been settled, you may ask the court for a discharge of the remaining unsecured debts. This motion prevents any of these creditors from further collection activities on any debts in the plan.

Do I really need a bankruptcy attorney?

If your company is in dire financial straits, perhaps a pre-packaged bankruptcy is an option. If not a pre-packaged bankruptcy, maybe a traditional Chapter 11. Either way, a bankruptcy attorney can take a load of your shoulders. An experienced bankruptcy attorney will be there to assist and guide you through the process. Contact Karina Lucid for a free initial case consultation.