No business owner wants to file Chapter 11.
There’s the stigma associated with bankruptcy, with the potential of a tarnished reputation. And then, there’s the loss of privacy. Business owners have to provide very detailed financial information to the bankruptcy court and this information becomes part of the public record.
With some Chapter 11 filings, compensation limits are imposed on senior executives, company officers, and other key stakeholders.
You no longer have full control over your company. Court approvals are needed for business operations such as refinancing, vendor agreements, and business expansion.
And, just to get a court to agree to a Chapter 11 petition, you have to prove that the company can be profitable under a Chapter 11 reorganization.
But, there are a host of benefits too.
Chapter 11 allows a business to continue operating with restructured debt and lower payments. An “automatic stay” prevents foreclosures and ongoing debt collection. The stay protects the debtor from all lawsuits, bank levies, foreclosures, repossessions, and wage garnishments.
Debtor assets and all creditors are brought into the same court, which allows the rights of all the stakeholders to be decided in a balanced way. In short under Chapter 11, the business owner, or the corporation, can get on with the task of running the business without the strain and dissipating distractions of dealing with creditor demands and other time-consuming issues.
The Chapter 11 Process
- File a Petition
The debtor files a petition with a U.S. bankruptcy court under Chapter 11 protection. Once filed, the case officially begins with an automatic stay of collections. Creditors cannot pursue existing, or new collections. The stay gives the debtor time to develop a reorganization plan and negotiate better payment terms. Depending on the company and its specific issues, the reorganization plan is developed by creditors and stockholders, or by the management team with creditor and bank input. Once the petition is filed, the debtor sets up a payment plan under the supervision of the bankruptcy court. Payments are usually much lower than the original debt.
- Reorganization Plan
The reorganization plan can include renegotiating debts, downsizing the business to bring revenue in line with expenses, and in some cases, selling off non-performing assets. Creditors are assigned to different classes. First priority creditors can include state and federal tax agencies, stockholders, and employees owed salaries. Secured and unsecured claims are assigned to their own class. The reorganization plan is approved by the vote typically by creditors, with approval by the court.
- Confirmation and Debt Discharge
Depending on the specific situation, existing debt prior to the confirmation date can be discharged.
Don’t make a hasty decision to pursue Chapter 11 until you’ve had a thorough discussion with an attorney and an accountant.
Chapter 11 is complex, and it’s expensive. It can take years to pay off debts. You lose control over the company, while the bank, the creditors, and the court oversee certain areas of your business. And, your reputation is on public record due to the filing in bankruptcy court.
But, Chapter 11 remains a highly effective means for companies to continue operating while paying off debts under renegotiated and reasonable terms. In the end, Chapter 11 can make a company stronger with greater financial controls in place to handle future challenges.