Chapter 11 Bankruptcy
A chapter 11 bankruptcy, sometimes called business reorganization or business restructuring, is primarily designed to help struggling businesses reorganize their financial affairs to be able to continue operating. A chapter 11 bankruptcy may also be used by individuals who do not operate a business, but a chapter 11 is only advisable for such individuals if their debts are too high to qualify them for chapter 13 bankruptcy, and they do not qualify for or for other reasons cannot file for chapter 7 bankruptcy.
One of the policies underlying chapter 11 bankruptcy is that it is better to enable a business to continue operating, as opposed to simply liquidating, because this preserves the going concern value of the business, and in addition preserves jobs and avoids the other detrimental effects on the local community that usually result from the dissolution of a business. As a result, a chapter 11 bankruptcy offers many options and significant flexibility to a business debtor that are not available outside of bankruptcy. In addition to the automatic stay, which prevents most creditors from taking any collection action against the debtor, a chapter 11 bankruptcy enables the debtor to:
Of course, whether any one of these options is available to any particular debtor depends on that debtor’s specific circumstances.
Even if there is no intent to reorganize a business, a chapter 11 bankruptcy is often beneficial to allow for an orderly liquidation of the business. If the business can continue operating and producing income, or if there are assets unencumbered by liens, this option should be considered.
A chapter 11 bankruptcy is implemented through the proposal and court approval of a reorganization or liquidation plan, a document which sets out the terms on which the reorganization or liquidation will take place. Importantly, the debtor usually has the exclusive right to propose such a plan during the 120 days after the filing of bankruptcy. This allows the debtor additional time and leeway to determine how best to proceed in restructuring or liquidating its business.
Ultimately, each chapter 11 bankruptcy requires an individualized approach, based on the business’s unique financial condition and the goals of its management. Because of the complexity involved in chapter 11 bankruptcy cases, and the planning that is often required in order to take full advantage of the benefits of bankruptcy, it is best to contact an experienced bankruptcy attorney as soon as the business begins to experience significant financial difficulties.
One of the policies underlying chapter 11 bankruptcy is that it is better to enable a business to continue operating, as opposed to simply liquidating, because this preserves the going concern value of the business, and in addition preserves jobs and avoids the other detrimental effects on the local community that usually result from the dissolution of a business. As a result, a chapter 11 bankruptcy offers many options and significant flexibility to a business debtor that are not available outside of bankruptcy. In addition to the automatic stay, which prevents most creditors from taking any collection action against the debtor, a chapter 11 bankruptcy enables the debtor to:
- eliminate or in other ways modify unsecured debt
- reduce secured debt
- reduce interest rates on secured debt
- reject unfavorable contracts
- obtain new financing by offering the lender incentives that are not available outside of bankruptcy, such as a lien with priority over all pre-existing liens
- use, sell, or lease property of the estate, even if the property is subject to a lien
- recover transferred property
- avoid preferential, fraudulent, and certain other transfers
Of course, whether any one of these options is available to any particular debtor depends on that debtor’s specific circumstances.
Even if there is no intent to reorganize a business, a chapter 11 bankruptcy is often beneficial to allow for an orderly liquidation of the business. If the business can continue operating and producing income, or if there are assets unencumbered by liens, this option should be considered.
A chapter 11 bankruptcy is implemented through the proposal and court approval of a reorganization or liquidation plan, a document which sets out the terms on which the reorganization or liquidation will take place. Importantly, the debtor usually has the exclusive right to propose such a plan during the 120 days after the filing of bankruptcy. This allows the debtor additional time and leeway to determine how best to proceed in restructuring or liquidating its business.
Ultimately, each chapter 11 bankruptcy requires an individualized approach, based on the business’s unique financial condition and the goals of its management. Because of the complexity involved in chapter 11 bankruptcy cases, and the planning that is often required in order to take full advantage of the benefits of bankruptcy, it is best to contact an experienced bankruptcy attorney as soon as the business begins to experience significant financial difficulties.
