Chapter 11 (Business Reorganization)
When a business becomes insolvent (liabilities are greater than assets), it too may need to seek bankruptcy protection. Similar dangers of foreclosure, repossession or even the threat of receivership often facilitate the filing of a Chapter 11 bankruptcy. When a debtor files chapter 11, the “old” debtor then becomes the “new” debtor. That “new” debtor is called a “debtor-in-possession” (“DIP”). Essentially, the company is allowed to act as its own trustee and operate under the same processes as it did previously. Often times, a struggling business is afforded a few months as “breathing time”, wherein it will be required to file a proposed Chapter 11 Plan of Reorganization.A. Filing a Chapter 11
Any company that is contemplating the notion of filing for Chapter 11 bankruptcy protection must ask itself one simple preliminary question: is there light at the end of the tunnel for this business? It must be understood before filing bankruptcy that Chapter 11 is time-consuming, expensive, and a process wherein the odds are often stacked against you. Therefore, any company contemplating Chapter 11 bankruptcy must recognize that the road they must travel is tough and therefore, they must be sure of the expenses and efforts to be made before filing and during the process.
Filing a Chapter 11 bankruptcy is not too dissimilar from filing an individual’s bankruptcy. It involves significant efforts by the perspective Chapter 11 debtor to provide the attorney information, paperwork, and other financial documents. It also requires the debtor to provide a complete and accurate list of all the company’s debts and assets. The key to the success of a chapter 11, at least the portion of success that can be controlled, is preparation. Surprises can cause your company to be kicked out of Chapter 11, which makes it essential to discuss Chapter 11 and the potential for your company filing Chapter 11 with an experienced attorney. An experienced attorney will provide you the template needed to supply this important information and then assist you in preparing the documents in formulating a game plan to maximize potential for success once the case is filed. The experienced attorneys of Arnold & Smith, PLLC can provide this assistance to you. If you like to speak with one of our attorneys about filing a Chapter 11 bankruptcy, please contact us here.B. Plan of Reorganization
Chapter 11 debtors have certain timelines in which they must file their proposed plans to exit chapter 11. Essentially, they would propose some long term solution to their debt problems, whether that be cutting certain unprofitable divisions, fractional payments to creditors, or even layoffs. Whatever the proposal, the creditors have a right to vote on this Plan, more often than not, whether the terms of the Plan are feasible. The Debtor in a Chapter 11 has a big skeptical burden from the begining: after all, it was the Debtor whose income was depressed and they couldn’t fulfill their debt obligations. So what confidence do the creditors have in the debtor turning things around at this juncture? The Debtor’s burden is to show a rebound from the filing of the bankruptcy or that those necessary changes have been made to allow a “leaner and meaner” company, which can now fund plan payments to those creditors. Lastly, the biggest weapon in a Debtor’s arsenal is the alternative: liquidation, specifically, the lack of the creditor recouping any value in liquidation. Certainly for service business and those other businesses that may have UCC liens, most creditors would net nothing if the Plan and the Debtor fail. Thus, many creditors are willing to take a chance on a Chapter 11 Debtor’s Reorganization, since they stand nothing to lose if the Debtor fails; something is better than nothing.C. Exiting Chapter 11
If a Chapter 11 plan is agreed upon by the creditors of the company or otherwise confirmed by the Bankruptcy Court, the debtor now holds its own fate in its hands. As mentioned, a Chapter 11 plan is nothing short of a contract with the company’s creditors. If the debtor fulfills those terms as stated in the Chapter 11 plan, the debtor will have successfully reorganized, free from those existing obligations now discharged. Closing and Chapter 11 plan and completing terms of the Chapter 11 plan is the light at the end of the tunnel.