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How Chapter 11 Business Bankruptcy Works

For business debtors, including partnerships, corporations, and other types of business entities, an alternative to a Chapter 7 bankruptcy is filling for a bankruptcy under Chapter 11. Unlike Chapter 7, where your business assets will be sold and distributed to pay the creditors, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization under Chapter 11. Below are a few things business owners need to know about a Chapter 11 business bankruptcy.

What Is Chapter 11 Business Bankruptcy?

A bankruptcy filed under Chapter 11 of the US Bankruptcy Code is commonly referred to as “reorganization” bankruptcy because it reorganizes the business to be more efficient and to be able to pay the creditors. Under Chapter 11, a business may declare bankruptcy but will continue to operate the business under supervision. It is usually sought and granted in the case where the business has a chance of recovering and carrying on with its business. Although bankruptcy court may reduce the debts, the business debtor must continue to pay its debts through future earnings. In short, under Chapter 11 your business assets are not sold to pay the creditors but your business debts are also not absolved.

How Does a Chapter 11 Bankruptcy Work?

As in Chapter 7, a Chapter 11 case starts with the filling of the bankruptcy petition in the state where the business is organized or has its principal place of business or principal assets. In the petition, you need to include an intent to file a plan for reorganization. Unlike Chapter 7, however, even after the debtor filed for bankruptcy, it continues to be in possession of the business assets (referred to as a “debtor-in-possession”) instead of the court appointed bankruptcy trustee. [11 U.S.C. § 1107]. Accordingly, the debtor is in charge of managing the business and the business debts which requires the debtor to perform the following duties: accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator. [11 U.S.C. § 110611 U.S.C. § 1107 and Fed. R. Bankr. P. 2015(a)]. During the bankruptcy process, the United States Trustee will monitor the debtor-in-possession’s operation of the business and submission of informational reports and filing fees. A creditors’ committee, appointed by the US Trustee, also investigates the debtor’s conduct and operation of the business. [11 U.S.C. § 1103]. The committee safeguards the proper management of the business by the debtor-in-possession in Chapter 11 cases. A creditor’s committee may also participate in formulating a repayment plan and agrees on how business assets are to be distributed to creditors.

Chapter 11 is different for a small business debtor. Small business cases are determined by a two-part test: (1) the business debtor must be engaged in an ongoing business with debts of $2,566,050 or less; and (2) there is no creditor’s committee. [11 U.S.C. § 101]. In a small business case, the debtor-in-possession must provide initial financial statements, including the most recent balance sheet and tax returns, statement of operations, cash-flow statement and other statements. Compare to other Chapter 11 debtors, the small business debtor is subject to more oversight by the US Trustee. The benefit of small business case is that it can be accomplished more quickly than other Chapter 11 cases because filing deadlines are different and extensions are more difficult to obtain.

Once a bankruptcy petition is filed, an automatic stay is set in place and prevents collection activities by the creditors against the business during the bankruptcy process. The stay gives the business debtor some time to deal with its financial difficulties.

Only a debtor-in-possession may file a “plan of reorganization” within the first 120 day period after the bankruptcy petition is filed. [11 U.S.C. § 1121(b)]. The period may be extended by the court for up to 18 months after the petition date. In small business cases, the plan must be submitted within 300 days after the filing. [§ 437 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005]. If the exclusive period expires before the debtor-in-possession has filed the reorganization plan, other parties in interest such as the creditors’ committee or a creditor, may file a plan. [11 U.S.C. § 1121(d)]. The reorganization plan addresses on how existing creditors will be paid and how the business will operate going forward. All the classes of claims, involving creditors, taxing authorities, employees and anyone else with a significant state in the case, must vote to accept the reorganization plan. If any one class rejects the plan, the debtor must demonstrate to the court that the plan is fair and equitable. Once the plan is accepted and confirmed, the Chapter 11 bankruptcy process is ended and the business debtor must operate according to the plan. If it fails to conform with the plan, creditors can ask the court to compel the business to liquidate under Chapter 7.

Cumming Georgia Business Bankruptcy Attorneys | Chapter 7 & Chapter 11Advantages and Drawbacks of Chapter 7 Bankruptcy

Under a Chapter 11 bankruptcy, you do not have to close and liquidate your business. In many cases, a business debtor may be able to fully pay the creditors of the business and survive from Chapter 11. You will continue to operate your business normally afterwards. In Chapter 11 cases you can also renegotiate some financing terms to get lower interest rates or change the terms of unfavorable contracts.

However, when you file Chapter 11, your business debt will still be there and you need to run your business according to the reorganization plan under the creditors and the trustee’s supervision. As mentioned earlier, if you failed to operate you business according to the plan, you will be subject to a court order requiring you to liquidate your company. In some cases, a business fails to meet the obligations under the reorganization plan and is eventually sold after some period of time.

A Chapter 11 business bankruptcy may be appropriate for you and your company depending on your financial circumstances. You may want to file for bankruptcy under Chapter 11 before it is too late and your business has no option but to file for Chapter 7 bankruptcy. However, filing a Chapter 11 case is not a process that can be taken lightly because it imposes legal obligations on how you operate your business for a certain period of time. If you feel your business may be facing financial difficulties, therefore, meet with a bankruptcy attorney and be sure to discuss your particular circumstances with the attorney.

Filing a Chapter 11 or Chapter 7 Business Bankruptcy

A business must use a bankruptcy attorney to file a Chapter 7 or Chapter 11 business bankruptcy. Because of the complexity of the cases, if is highly advised that an experienced business bankruptcy attorney be consulted with as soon as possible in the process. If your business is facing a business bankruptcy, call us at 770-609-1247 to discuss your case with one of our experienced business bankruptcy lawyers. Contact >>

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