Facing creditors and keeping the business afloat can be stressful. When everything gets out of hand, there are two options available for business owners- shutting the operation or filing for Chapter 11 bankruptcy. Opting for the latter results in some negative implications, but it also helps you regain momentum and start anew.
In essence, Chapter 11 of the U.S. Bankruptcy Code provides a reorganization plan for the debtors. This allows them to borrow funds to continue the business with the court’s approval. An expert lawyer from a reputable firm is adept at helping you leverage the benefits of Chapter 11 bankruptcy.
Specifically, they can help you with the following:
- Stop the debt collectors under the automatic stay provision
- Allow the debtors to keep the assets while creating a plan to reorganize the finances
- Erase the dischargeable or unsecured debts
- Let the debtors continue operating the business
- Restructure debts and pay the affordable amount
- Help you get qualified for refinancing and get offered a manageable payment term
How to file for Chapter 11 bankruptcy
The process begins by hiring a reliable lawyer to help you file a petition in a federal bankruptcy court. This court is usually within your area of business, residence, or domicile. Your attorney will help you compile and submit the necessary documents to prove your dire situation. The financial disclosure package should include the following:
- Assets, properties, and liabilities
- Statement of financial affairs
- Schedules of current income and expenditures
- Executory contracts and unexpired lease agreements
Your lawyer will also assist you in creating a repayment plan proposal and help you prepare for the court proceedings. To qualify, your secured debts (car payments, mortgage) must not exceed $1,184,2000, and the unsecured debts (credit cards) should be $394,725.
The filing fee for Chapter 11 is around $1,167 plus an additional $571 for the miscellaneous administrative fee. Also, petitioners need to pay a court fee that ranges from $325 to $30,000 every quarter,
How does Chapter 11 Bankruptcy work?
Once the court accepts the case, all creditors cease the collection efforts, including requests for payments, eviction, property seizure, foreclosure, or lawsuit. This remains in effect during the duration of the petition.
The court will schedule the confirmation hearing between the debtor and the creditor’s lawyer. It is known as Section 341 meeting, where both parties/representatives are under oath to ask or answer questions.
Afterward, the creditor will submit their proposed modification plan to the court. It may take several changes until the court approves it. The court specifically needs two-thirds of the creditors to accept the plan before it is confirmed.
A Chapter 11 petition may take six months up to two years. Bankruptcy filers have 18 months to submit the restructuring plan, while the creditors are given up to 20 months to accept the terms in the proposal. Once approved, the petitioners must abide by the repayment terms that usually take six months to two years.
It also allows the debtors to liquidate some assets to cover the debts at their discretion. It should be part of the proposed debt repayment plan. To ensure a successful result that includes retaining assets’ ownership, the filing party should have a sound and reasonable plan.
What are the limits of Chapter 11 Bankruptcy?
Chapter 11 does not work in some cases. A sole proprietor seeking debt relief may not qualify because the owner is the same entity.
In partnerships, the court may require the members to use their personal properties and assets to repay the debts. Only corporations are shielded from the harsh actions of the creditors. There are also cases when the court converts Chapter 11 bankruptcy to a Chapter 7 liquidation process. This happens when the creditor proves that the petitioners are not properly running the business or misusing assets.
Whether you are filing a Chapter 11 bankruptcy as a company owner or an individual, you need a competent lawyer to represent you. Trusted and experienced law firms have teams of attorneys who can help you make an excellent repayment plan and the type of bankruptcy you need to file. It is wise to have a well-versed legal expert to help you go through the ordeal.