Extending a businesses’ lifespan requires tinkering to maintain solvency. Over time, a lot of effort goes into staying abreast of industry fluctuations, changing officers, negotiating contracts, and keeping costs down. These tasks are all necessary to staying vital.
Companies that can’t keep up with the necessary changes may lose money or viability. When the situation gets serious, bankruptcy is an option available to struggling businesses.
Chapter 11 bankruptcy is commonly used by businesses that want to reorganize and keep operating. The process is designed to maintain solvency and give the principals a chance to get back on their feet. Having a bankruptcy communication strategy is an integral part of regaining your business’ market share.
The Role of Creditors in Chapter 11 Bankruptcy
Bankruptcy requires specific steps, including taking orders from a bankruptcy trustee and, often, a committee of creditors.
Creditors are those who are owed money by the company entering bankruptcy. Creditors are categorized as secured or unsecured, according to the collateral they hold against the amounts due. Bankrupt businesses may be restrained from communicating with creditors during the early phase of Chapter 11 to avoid complicating the process. An experienced bankruptcy attorney provides guidelines on how to communicate with creditors during the Chapter 11 process.
In Chapter 11 bankruptcy, creditors can play active roles in negotiating the company’s reorganization. This happens through:
- Pre-bankruptcy negotiations that result in a reorganization plan for the company, or
- Working with other creditors through the creditor’s committee to monitor the reorganization plan after the company files Chapter 11.
Communicating With Creditors During Chapter 11 Bankruptcy
When bankruptcy filings are approved by the court, an automatic stay is issued that prohibits creditors from contacting the individual or business entering bankruptcy. The automatic stay also pauses any lawsuits related to nonpayment of qualifying debts.
The company entering Chapter 11 should consult their attorney before disregarding the stay and communicating with creditors. Structured, mediated meetings with creditors are a better option than casual, one-on-one conversations that can muddy the bankruptcy process.
The process provides for debtor-creditor meetings in Chapter 11, such as:
- Three to five weeks after the bankruptcy filing, a representative of the U.S. Bankruptcy Court convenes a 341 Meeting that brings together the debtor and creditors. In this meeting the debtor answers questions under oath about the company’s financial condition, liabilities, and motivation for seeking bankruptcy. It may be an opportunity to sketch a reorganization plan and listen to creditors’ ideas. This meeting allows the bankruptcy trustee to prioritize secured and unsecured debts and develop an outline for repaying some of the debt.
- The bankruptcy judge allows a reorganization plan when there’s assurance that the creditors will receive the same reimbursement amounts that they would in a liquidation bankruptcy. Negotiations take place when creditors with unsecured loans become part of a creditor’s committee that advises and works with the trustee overseeing the case.
- During the Debtor in Possession phase when the reorganization plan is in effect, the debtor conducts normal business operations, including regular communications with creditors. If any of the debtor’s actions are outside of normal transactions, such as expanding the business or selling assets, the court must pre-approve them.
Attorneys’ Roles in Chapter 11 Creditor Communications
The debtor’s attorney plays a critical role in communicating with the bankruptcy trustee and managing relationships with creditors. An experienced Chapter 11 attorney advises debtors on their interactions with secured and unsecured creditors and keeps the Debtor in Possession on schedule with meetings and payments related to the bankruptcy.
The attorneys at Kerkman and Dunn have decades of experience navigating Chapter 11 with clients, from pre-filing negotiations to developing a strategic approach to the reorganization plan and creditor relations. Milwaukee-area businesses who consult with Kerkman and Dunn get the most experienced, strategic assistance available to guide them through the bankruptcy process. Call for a consultation before filing.
