What to Expect When You File Chapter 11 Bankruptcy
Companies in financial distress may be able to use Chapter 11 bankruptcy to restructure and reduce debts, ultimately reemerging as healthier businesses. At one time, only large corporations could afford the costs of Chapter 11, but thanks to change in the Bankruptcy Code, many small businesses are able to take advantage of a streamlined version known as Subchapter V. A company doesn’t have to be organized as a corporation to seek Chapter 11 relief. It could be an LLC, partnership or virtually any other entity.
Chapter 11 reorganization is a complex process that can take six months to two years or more, depending on the size of the company and the complexity of its debt situation. The following is a general idea of what you’ll experience as a Chapter 11 debtor.
Within a few days of filing, an automatic stay goes into effect, putting an immediate stop to collection efforts, foreclosures and other creditor actions. The stay gives you room to handle your business as a whole rather than fend off individual creditors.
Next, your attorney may file “First Day Motions.” These are requests for immediate relief so you can keep paying your employees, health care premiums, utilities and costs of other essential items.
Except in rare cases, a debtor is allowed to continue running the business. During Chapter 11, you are known as the debtor in possession (DIP). That means you remain in control of the company even though you may need court approval to do certain things, such as entering or breaking a lease, selling certain assets or modifying vendor contracts. You may be able to obtain DIP financing to raise money needed to operate during Chapter 11.
A creditors’ committee may be formed with the goal of ensuring that all creditors receive fair payment on their claims or have them satisfactorily resolved. The committee or its attorney negotiates with you and has input on the reorganization plan. Creditors can support or oppose actions that require court approval. There is no creditors’ committee if you are seeking a small business reorganization using Subchapter V.
Within 120 days of filing or any extension granted by the court, you must submit a reorganization plan that specifies how you propose to have your company pay its debts and emerge as a solvent entity. The creditors will vote on whether to approve your plan or to propose alternate plans. If they don’t believe a Chapter 11 reorganization is viable, they may request that the case be converted to a Chapter 7 liquidation. Once your Chapter 11 plan is confirmed, you can proceed with running the business and executing the plan.
The Law Offices of Michael Jay Berger in has represented business owners in more than 130 Chapter 11 cases. You can trust the lawyers at my Beverly Hills firm to take you through the process and work effectively toward plan confirmation. Please call 310-271-6223 or contact me online to schedule a free consultation.