How Are Your Debts Reorganized in Chapter 11?
Chapter 11 bankruptcy offers many benefits to troubled companies, including relief from unsustainable levels of debt, a way out of burdensome contracts and some much-needed breathing room to develop a plan for the future. Once the creditors agree to a reorganization plan, the company gets a fresh start and a new balance sheet that better aligns with the business’s prospects for returning to profitability.
However, if your business files for Chapter 11, you can expect some resistance to your proposed reorganization plan. Creditors’ claims are separated into different classes — priority, secured and unsecured — and payments are prioritized accordingly. Each class of creditors gets to vote to accept or reject your plan. Creditor objections are fairly common and they are a major reason why you need an experienced Chapter 11 lawyer’s help.
Priority debt, which includes property taxes, income taxes and payroll taxes, is one class of debt that can be reorganized in a way that allows you to catch up on arrears while keeping the company running. Typically, tax obligations are paid off over five years but you may be able to negotiate with the taxing authority for different terms that are acceptable to both sides.
Secured debt can also be reorganized. The owner of the business identifies which items of loan collateral are needed to help the business become profitable. Then, rather than paying what is owed, the owner may be able to pay only the current value. For example, imagine you have a fleet of 15 work trucks. You owe $375,000 on them in total but their market value is only $200,000. You would ask the court for permission to pay only the $200,000. This reduces your business’s monthly operating expenses, thus inching it closer to profitability.
You can use Chapter 11 to restructure unsecured debts like company credit cards, signature loans and other loans. Two common options are to make periodic payments over a span of years or to make one lump sum payment at the end of the Chapter 11 case. If you and the creditors cannot agree on a payment structure, the bankruptcy judge may impose one.
Leases and service contracts can also be reorganized. Because the idea of Chapter 11 is to restore the solvency of the business, you are able to break existing contracts and sign up for more affordable ones. If you have existing leases for office or warehouse space, you’ll need to affirm your intent to retain those leases and you may be able to renegotiate the rent.
Getting creditor approval and dealing with creditors who object to your Chapter 11 plan is sometimes difficult. At the Law Offices of Michael Jay Berger in Beverly Hills, my team of bankruptcy attorneys routinely obtains plan confirmations for companies in financial straits. To discuss your situation, please call us at 310-271-6223 or contact us online to schedule a free initial consultation.