Basic Steps in a Chapter 11 Case for Small and Mid‑Sized Businesses

Chapter 11 is a court-supervised process that allows financially distressed small and mid-sized businesses to restructure their debt, continue operating and develop a viable path to financially stable ground. The business ordinarily remains in control of its operations as a “debtor in possession,” but there are reporting and fiduciary responsibilities, and certain decisions require courts approval. 

Although every case is different, the following are the typical steps in a Chapter 11:

1. Pre-filing assessment — This is essentially triage to determine whether Chapter 11 can effectively redress the company’s financial woes. Management should evaluate its debts, assets, liquidity, contracts and operating performance. This stage may also involve preparing an initial budget, negotiating with lenders and identifying the funding needed to continue operating.
2. Filing the Chapter 11 petition — The filing generally triggers an automatic stay, which stops most collection actions, lawsuits, foreclosures and repossessions. The company must also file schedules and statements with details about its assets, debts, income and financial affairs.
3. Filing first-day motions — These request authority to continue essential business activities. Motions may address employee wages and benefits, cash management systems, insurance, utilities, critical vendors, cash collateral and debtor-in-possession financing.
4. Stabilizing cash flow — Management must closely monitor the company’s receipts and expenditures. A rolling 13-week cash-flow budget can help the business manage liquidity, anticipate shortfalls and demonstrate financial discipline to lenders, creditors and the court.
5. Negotiating with secured lenders — These are creditors with liens on the company’s inventory, equipment or real estate. Management may negotiate for use of cash collateral, modified loan terms or additional financing, all relevant to the company’s broader restructuring strategy.
6. Evaluating contracts and leases — Chapter 11 allows a company to assume agreements that remain beneficial, sometimes after curing defaults, or to reject those that have become overly burdensome. This can help reduce expenses and end obligations that interfere with recovery.
7. Drafting the reorganization plan— The plan provides for restructuring company debts and treating different creditor and ownership interests. It may include modified interest rates, asset sales, exchanges of debt for equity and partial payment of certain claims.
8. Obtaining confirmation of the plan — Creditors have an opportunity to vote on the proposed plan. The court determines whether plan was proposed in good faith and is financially feasible. In some cases, the court may confirm a plan over the objection of a dissenting creditor class.
9. Executing the confirmed plan — The business must make required payments, complete approved transactions and comply with operational or governance obligations. Management must continue monitoring performance and address problems promptly as they come up.

By approaching each step as part of a coherent strategy, a small or mid-sized business can greatly improve its prospects of emerging from Chapter 11 on a sustainable foundation.

The Law Offices of Michael Jay Berger in Beverly Hills represents businesses Chapter 11 bankruptcies throughout Southern California. Call 310-271-6223 or contact us online to schedule a free initial consultation.