Financial difficulties can strike any business, regardless of industry. Recovering from these challenging times requires reassessing any outlying bills or debts to map out any next steps. Sometimes, this involves filing for Chapter 11. Bankruptcy may seem intimidating. However, understanding its usefulness and benefit to business partnerships can help provide the valuable information needed to make necessary business-saving decisions.
What Is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is often filed by corporations or partnerships facing financial instability. Debtors put up a reorganization plan in this kind of bankruptcy to pay creditors during their financial recovery period.
Chapter 11 can do the following:
- Suspend creditors’ efforts to collect debts.
- Make debt settlement negotiations more manageable.
- Enable a company to obtain new funding with better financial conditions.
While restructuring a business’ financial commitments, the objective is to keep these companies afloat and deter creditors. Chapter 11 filings differ significantly from Chapter 7 filings. Those are more typically available to a firm that has too much debt to be operating normally.
How to File for Chapter 11
With any major financial decision, especially those as serious as bankruptcy, understanding the steps that go into these filings is essential for starting the process. Understanding how a Chapter 11 filing affects a company’s business and reputation is an important part of becoming acquainted with the process. The most prominent parts of filing for Chapter 11 bankruptcy include:
- Step 1: Reevaluate your current financial standing. Before considering bankruptcy, make sure to have a thorough grasp of all current business operations and financial standings. Filing for Chapter 11 can only be done once every six months. Without proper foresight, the effectiveness of these filings can be ill-planned and backfire.
- Step 2: Speak with an attorney. After doing the initial work of understanding these filings, speaking with a tax attorney can help get the legal insight needed to solidify the decision for Chapter 11. An attorney’s approval is not necessary to file for bankruptcy. However, getting legal advice before taking on such a massive financial undertaking can be helpful when exploring all options.
- Step 3: Meet with creditors. Once filed, contacting creditors about a recovery plan will be done within 120 days of filing. For some businesses, an involuntary bankruptcy filing from creditors can require them to start drafting a recovery plan. For most companies, though, a plan will be proposed and negotiated with creditors after submitting the filing.
- Step 4: Become a “Debtor in Possession.” The title “debtor in possession” describes a business that is now formally recognized as filing for bankruptcy. They still control any business-related assets. However, they are now tasked with reevaluating the business’ financial obligations to reach a newfound sense of stability.
- Step 5: Starting the reorganization plan. The business’s reorganization plan, which includes a recommendation for how much to repay each creditor or a business tax plan, is critical for Chapter 11 filings. The partners then meet with a committee of prominent creditors designated by the court after the plan is submitted. A business spokesperson is required to respond to questions from creditors regarding the company under oath at this meeting, known as a Section 341 meeting. This helps them understand the exact ways this plan will be executed.
- Step 6: Incorporate creditor modifications into the reorganizing plan. The next step is for creditors to submit any significant changes to the plan that they would like to see. Following some deliberation, the court accepts a significantly modified version of the original plan that now suits the creditors. Creditors then have a vote, and the court will confirm the plan if two-thirds of the creditors agree to it, ending the legal aspect of the bankruptcy.
Once finalized, any current debts owed by the court are replaced with the new, agreed-upon debts and used to execute the reorganization plan. These debts can be less than the original amounts due. However, previous negotiations will have created a legally binding repayment plan with new amounts. The length of time it takes to process a reorganization plan can exceed a year, with creditors getting almost two years to propose their changes and settle on a final plan. In its entirety, the process for filing for Chapter 11 can take anywhere from six months to two years to finalize and settle.
Q: What is the downside of Chapter 11?
A: Although good for starting the journey towards financial security, reorganizing a business under Chapter 11 can bring:
- Unwanted stigma
- Business restructuring
- Publicity about a company’s dealings that could affect its earning capacity
Deciding to go through with filing for Chapter 11 takes an immense amount of forethought and planning. For some, it is the only option when facing financial troubles, so taking on these negative consequences is necessary.
Q: What can I expect in Chapter 11?
A: Once filed, Chapter 11 allows businesses to restructure their current model and make the necessary changes to reach financial stability once again. Within 120 days of filing, this new business plan needs to be sent to any creditors. They will either approve or deny the claim and move forward with negotiations outlining the plan to get out of debt.
Q: Is Chapter 11 bankruptcy complicated?
A: Although somewhat more complicated than Chapter 7 or Chapter 13 filings, Chapter 11 bankruptcy is the most useful for business owners when filing for bankruptcy. For small businesses, Chapter 11 filing allows them to simultaneously fill out the terms of their agreement while remaining open. This can be a huge benefit to businesses if all restructuring plan guidelines are followed.
Q: How long does it take to recover from Chapter 11?
A: This depends on the business restructuring plan for an individual business and their success in achieving that plan. The time it takes to escape bankruptcy can vary from business to business. For creditors, predicting the recovery rate or timeline of any business they are involved with will vary drastically as well.
Getting Help With Chapter 11 Questions
It may feel intimidating to take the steps toward filing for Chapter 11. However, accepting this step can be necessary to save any financially troubled business. With the help of an accomplished tax lawyer, the Chapter 11 process can be easy to understand. For California residents, we at Coggins Law can help. For more information on our services, contact us today.