What Is a Chapter 11 Bankruptcy?
A small business that is struggling with a heavy debt burden may be able to seek relief by filing for bankruptcy. Depending on the circumstances, a business debtor can file either a Chapter 11 or Chapter 7 petition. A Chapter 11 bankruptcy is designed to allow a business to reorganize its debts and return to profitability. If the future prospects for the business are not good and the debts cannot be reorganized, the alternative is to liquidate the business through a Chapter 7 bankruptcy. In either case, it is essential to engage the services of an experienced business bankruptcy attorney.
Chapter 11 bankruptcy is one in which a small business has the opportunity to reorganize its debts while continuing to operate. A small business debtor is one that is engaged in business or other commercial activities and owes no more than $2,490,925 in total claims at the time the bankruptcy petition is filed. A court-appointed trustee will oversee the bankruptcy.
In this form of bankruptcy, the business files a plan for paying its debts over a set period of time and must also propose a plan to return to profitability. In addition, the bankruptcy petition must include a recent balance sheet, statement of operations, cash flow statement and a federal tax return. A plan that is deemed to be fair and equitable by the court will be approved.
While Chapter 11 bankruptcy may enable a small business to restructure its debts, regain profitability and continue to operate, it can be a lengthy and expensive process. Moreover, many Chapter 11 bankruptcies are not successful and are ultimately dismissed by the court. If it determines the business does not have a chance to become profitable, the court will convert the bankruptcy to a Chapter 7 and the business will be liquidated.
Chapter 11 is a type of reorganization bankruptcy, and is available to individuals, corporations, and partnerships. There are no limits on the amount of debt and is the typical bankruptcy choice for large businesses who are seeking to restructure their debt in order to become profitable again. Chapter 11 is considered to be the most flexible of all the bankruptcy chapters. This is what makes it generally more expensive to the debtor. It is important to note that the rate of successful reorganizations is generally very low.
Chapter 11 bankruptcy allows the debtor business to reorganize its finances in order to eventually pay off its debts, and continue operating once the bankruptcy process is complete. The process is initiated when the business files a petition for Chapter 11 with the bankruptcy court. They are then given 120 days to create a plan to reorganize the business in a profitable way.
In order to make the business profitable again, the plan could involve cutting off certain unprofitable parts of the business. An example of this would be discontinuing an advertising or research department. The restructure plan must also provide details regarding how the business will pay off its creditors in the future. This plan must be approved by the creditors. Management may continue to run the business, but the bankruptcy court must approve of all significant business decisions.
What Steps Are Involved In Developing a Reorganization Plan? What Happens to Company Stock?
When developing a reorganization plan for a Chapter 11 bankruptcy, there are certain steps that the company must follow in order for the bankruptcy court to approve of their plan.
The company starts by developing a plan with different committees. These committees represent creditors, stockholders, and possibly others. From there, the company prepares a disclosure statement and reorganization plan. It is then filed with the bankruptcy court.
The Securities and Exchange Commission reviews the statement in order to ensure that it is complete. Creditors vote on the plan; if the vote passes, the bankruptcy court confirms the plan, and the company carries out the plan. A company's stock may continue to trade even after the business has filed for Chapter 11 bankruptcy. Although a company may no longer be listed on a major stock exchange, their shares can still continue to trade.
Should the company come out of bankruptcy, there may be two different types of common stock. The first of which would be the old stock, which was on the market before the company filed for bankruptcy. The second type would be the new stock, which is issued as part of the company's reorganization plan. To denote if the old common stock was traded, there will be a five-letter ticker symbol, ending in “Q.” This is intended to indicate the bankruptcy proceedings. The new common stock will have no such ticker.
The Bottom Line on Chapter 11
Chapter 11 bankruptcy can be a powerful tool. Unlike the most common types of bankruptcy, which are focused merely on clearing debt, the goal of Chapter 11 is to put a business back on a profitable footing. That means the plan isn't just about cleaning up debt, and the considerations for both the debtor and the creditors are much more complex. Finding solutions that protect the debtor's interests and keep the business running while still protecting the creditors can be a challenge. An attorney with experience in formulating Chapter 11 plans can ease the process and improve the chance of success, for either the debtor or the creditor's committee members.
Do I Need an Attorney for Chapter 11 Bankruptcy?
If you find yourself considering filing for bankruptcy, you should consult with an experienced local bankruptcy attorney before proceeding. An experienced bankruptcy attorney can help you consider which chapter of bankruptcy would best suit your needs, and can also help you determine whether any alternatives to bankruptcy may be available to you.
Because state laws regarding bankruptcy vary widely, a local bankruptcy attorney will be better suited to helping you understand your state's specific laws and how those laws may affect your legal options moving forward. Additionally, should you file for Chapter 11 bankruptcy, your bankruptcy attorney can help you begin the process and create a legally sound and enforceable reorganization plan. Your attorney will also communicate with creditors on your behalf, and will represent you in court as needed.
