How Businesses Can Use Chapter 11 to Stop Secured‑Creditor Actions
When a financially distressed company is facing repossession, foreclosure or a sudden cutoff of operating funds, Chapter 11 can create the breathing room needed to stabilize operations and negotiate a workable path forward.
When a business files a Chapter 11, an automatic stay goes into effect instantly. This injunction freezes all collection activity, including repossessions of vehicles or machinery, foreclosure proceedings, UCC Article 9 sales and attempts to seize inventory or accounts receivable. For a small or medium-sized business, the stay can be the difference between shutting down and having a chance to reorganize.
Chapter 11 gives businesses the ability to challenge secured creditor claims. If a lien is improperly perfected, overstated or includes unauthorized fees, the creditor’s secured status can be reduced or eliminated. And if a creditor violates the automatic stay, the business can seek sanctions, damages and orders compelling the return of seized property.
One of the most powerful features of Chapter 11 is the ability to restructure secured debt through a court‑approved plan of reorganization. Even without creditor consent, the plan can modify interest rates, extend repayment terms, re-amortize loans or reduce a secured claim to the actual value of the collateral. This ability to reshape debt into manageable terms is often the key to long‑term survival.
Chapter 11 also gives businesses a way to use cash collateral, which often includes receivables, inventory proceeds and other liquid assets tied to a lender’s security interest. Without court approval, a debtor cannot use cash collateral, but Chapter 11 provides a structured process to request permission. The business submits a cash‑collateral budget, proposes adequate protection for the creditor and seeks authorization to continue operating. Courts routinely grant these requests because keeping the business alive typically preserves the value of the collateral itself.
Chapter 11 allows the business to pursue debtor‑in‑possession (DIP) financing. DIP loans often come with priority status, giving new lenders confidence to extend credit even when the business is distressed. This fresh infusion of capital can reduce the leverage of secured creditors who have cut off funding and can help stabilize payroll, inventory purchases and other essential expenses.
Chapter 11 also provides relief from burdensome equipment or real‑estate leases. The business can assume a lease, reject it or negotiate new terms under court supervision. Rejection converts remaining obligations into unsecured claims, reducing the creditor’s power and improving cash flow.
At the Law Offices of Michael Jay Berger in Beverly Hills, we help the owners of struggling companies in California pursue their legal options for debt relief and restructuring, including Chapter 11. Schedule a free consultation by calling 310-271-6223 or contact us online.
