Chapter 11 May Help Save Small Businesses

The economic downturn of the past few years has taken its toll on businesses as well as individuals. Many people who have spent their entire lives building their companies are finding their livelihoods threatened due to mounting debt. For small business owners looking for way to save their business, there may be an option with a Chapter 11 bankruptcy.

What Is Chapter 11?

A Chapter 11 bankruptcy is also known as reorganization. It is typically used by businesses so they can remain operational while paying off their debts. Although a Chapter 11 bankruptcy may be completed in a few months, it generally lasts several years.

How Does a Chapter 11 Bankruptcy work?

Once a Chapter 11 bankruptcy has been filed, an automatic stay comes into effect, barring creditors from seizing any assets or otherwise pursuing the company to collect on delinquent accounts. Next, a disclosure statement and a reorganization plan are filed with the court. The disclosure statement lists all of the company's assets and all of their liabilities. The reorganization plan outlines how the creditors will be repaid. Both the court and the creditors must approve this plan. The appointed trustee will evaluate the plan and conduct research to gauge its chances for success. If the trustee is satisfied, the plan is confirmed .

Advantages of Chapter 11 Bankruptcy

The most important advantage to a Chapter 11 bankruptcy is the continued operation of the business. Filing a Chapter 11 bankruptcy buys the company the critical time necessary to get its affairs in order. Another important benefit of the Chapter 11 bankruptcy is the ability of the debtor company to retain control of a good portion of the business's daily operations. This includes the ability to accept and reject contracts. The company may also continue to borrow money to assist with the daily operating costs. As one would expect, there are a few conditions. A secured creditor may not be placed at a disadvantage by the borrowing. Any additional loans are subject to court approval.

Disadvantages of Chapter 11

A Chapter 11 bankruptcy should not be considered without weighing it drawbacks. The biggest hurdle is the cost. Chapter 11 bankruptcies are very expensive. In addition to the filing fee of $1,039.00, there are attorney's fees to be paid throughout the administration of the plan. The fees can be as low as $5,000 but may reach as high as $1 million, depending on the size of the company involved. While this is a significant obstacle to overcome, it should not be the deciding factor alone. If the business has a reasonable chance of emerging from Chapter 11 bankruptcy as a viable entity, it may be worthwhile.

The second major drawback is a loss of control over major company decisions. The U.S. trustee is responsible for monitoring and administering the bankruptcy. This may include filing detailed monthly accountings for the court's review. Although the company may can make choices about the daily operations of the business, the court will have the final say on any large decisions affecting the company.

Finally, the most daunting aspect of a Chapter 11 bankruptcy is the possibility that a plan may not be approved. If the court determines that the business is not likely to succeed, it will not confirm the reorganization plan and the business owner may be forced into filing a Chapter 7 bankruptcy and dissolving the company.

Special Rules for Small Businesses

There are special rules for small businesses filing a Chapter 11 bankruptcy. A business with fewer than 500 employees, less than $2,343,300 million in debts and who has not had a creditors committee appointed by the US trustee may qualify as a small business case.

Small business cases will typically move more swiftly than other Chapter 11 filings, but they will also be subject to greater oversight in the way of interviews with the court, company reports and regular tax returns.

Explore Available Options With an Attorney

Bankruptcy is extremely complex and should not be pursued without a thorough evaluation by an experienced bankruptcy attorney. A local lawyer will be able to review a company's options so that an informed decision can be made about how to proceed.