Chapter 11 Relief Is Well-Suited to Times of Economic Crisis
The COVID-19 pandemic has been financially devastating to individuals and businesses alike. The purpose of Chapter 11 bankruptcy is to give companies in financial crisis the ability to continue operating while restructuring their debt payments over time. In short, it gives a business the pause it needs to catch its breath and start working to solve its financial obligations.
The following are some of the benefits Chapter 11 bankruptcy can provide for businesses that have encountered serious financial hardship due to COVID-19 and other economic setbacks.
- Automatic stay — When a business files for Chapter 11 bankruptcy protection, the court issues an automatic stay. This immediately halts all creditor action, which includes collection activity, foreclosures, repossessions, garnishments, levies and lawsuits. During the automatic stay, the business has 120 days to come up with a reorganization plan.
- Emergency operational relief — Within about 48 hours of a Chapter 11 filing, the court will schedule an emergency hearing that allows the business to ask for certain relief. In most cases, the requested relief includes authority to keep up payments such as employee wages, taxes, insurance premiums and bills in the ordinary course of business.
- DIP financing — It is also customary for a business to ask for debtor-in-possession (DIP) financing, which allows the business to obtain the funds it needs to stay operational during the bankruptcy process. Lenders typically offer DIP financing at low interest rates, since these lenders are afforded priority when it’s time for the debtor to repay its obligations.
- Special treatment for executory contracts — When a business is going through a serious financial crisis, it’s typical for it to be burdened by executory contracts, in which parties on all sides have obligations they have yet to satisfy. In a Chapter 11 case, the trustee has the authority to reject or terminate a contract to relieve the financial burden on the debtor.
- Free and clear sales — Chapter 11 bankruptcy gives businesses the ability to sell property and assets free and clear of encumbrances, including liens and other claims. This gives potential buyers an incentive to make an offer and helps the business get an infusion of cash needed to keep operating.
If your business has suffered due to the coronavirus pandemic, an experienced bankruptcy lawyer can help you explore your options, understand the pros and cons of Chapter 11 and make sound decisions about preserving the business you have worked so hard to build.
At the Law Offices of Michael Jay Berger, we are available to help your business through tough financial times. If you are considering filing a Chapter 11 and would like to discuss the specific facts of your case, contact us online to schedule a consultation or give us a call at 310-271-6223.