Chapter 11 Bankruptcy
So, one of the questions people frequently ask is how do I know that I am a candidate for a Chapter 11 bankruptcy? The answer is that there are usually a number of telltale signs. Below are a few indicators suggesting how a business could actually benefit from filing for a Chapter 11 bankruptcy:
- The company is receiving a substantial amount of collection calls and collection letters from collection agencies.
- The business is being threatened or is a current defendant in Fair Labor Standard Act lawsuits.
- The company would like to restructure its debt with secured creditors.
- The business would like to discharge a large amount of unsecured debt.
- The company’s long-term revenues will be higher than the liquidation value of its assets, allowing its creditors to get more money back if they allow the company to reorganize and work out a payment plan.
- A secured creditor is about to take back its collateral.
- A judgment creditor’s about to execute on its judgment lien.
- The business has a garnishment against its bank account.
- The business owns real property and is underwater and would like to eliminate or reduce secured debts against the property.
- Lawsuits are being threatened or are pending against the business.
- The business needs to acquire new financing with more advantageous terms.
- The business could profit from rejecting or canceling certain unfavorable contracts.
- The business owner wants to continue to manage daily operations of the entity while restructured financially.
- The business has been the victim of internal mismanagement and fraud and is looking for a way to deal with those issues.
HOW CHAPTER 11 BANKRUPTCY WORKS
The business filing for a Chapter 11 bankruptcy must submit a plan of reorganization for approval by the creditors and the court. The plan organizes the business’ debt into classes according to the type of debt. The plan sets forth how the debtor in possession intends to pay its various creditors over the term of the plan. The plan can provide that certain contracts are canceled, which can result in substantial financial benefit to the business. The debtor can also “avoid” certain payments made within the period, usually 90 days, prior to the bankruptcy filing, resulting in the money being returned to the business for the benefit of all of its creditors.
A majority of the creditors in the Bankruptcy Court must approve the Chapter 11 plan. That is not always the easiest thing to happen. However, once the plan is confirmed, the debtor in possession operates its business while making payments to fulfill all the obligations according to the terms of the plan. The Bankruptcy Court continues to supervise the Chapter 11 debtor’s business to ensure compliance with the plan for a limited period of time.
WHAT ARE THE DUTIES OF A CHAPTER 11 DEBTOR?
A Chapter 11 filing can be used to reorganize a large corporation, a small business or it could be utilized on an individual basis for those individuals that do not qualify for a Chapter 7.
The entity filing a Chapter 11 has certain fiduciary obligations including:
- Accounting for property and assets
- Examining and objecting to claims of creditors
- Filing required reports including monthly operating reports
- Obtaining court approval to employ professionals, such as attorneys, accountants, appraisers, auctioneers or others as needed during the case
- Filing tax returns
The office of the U.S. Trustee is responsible for monitoring the compliance of the debtor in possession. We have a strong relationship with the U.S. Trustee’s office and have established a good relation and reputation that benefits our Chapter 11 clients.
THE SMALL BUSINESS REORGANIZATION ACT OF 2019
This new amendment to the bankruptcy law will be extremely helpful to small businesses that are suffering from the COVID-19 pandemic.
Chapter 11 bankruptcy is meant to allow business to continue operating while they restructure their finances and negotiate debt with collectors. Historically, however, only large business and corporations have derived success from this type of bankruptcy. Because Chapter 11 is one of the most expensive and complex options, small businesses have struggled to see the same success as many cannot qualify for any other type of bankruptcy. In fact, less than 25 percent of small businesses who filed Chapter 11s between 2008 and 2015 managed to create and implement a successful reorganization plan. Since the federal government recognized this issue, they passed the Small Business Reorganization Act of 2019 and we anticipate an enormous growth in the success rate of completed bankruptcies as a result of the new law. As of February 2020, small business debtors can file under Sub Chapter 5 of Chapter 11 which offers new advantages and streamlined processes for small business bankruptcy.
Our attorneys are prepared to help small businesses take full advantages of this recalibrated option, especially in light of the COVID-19 pandemic.
CHAPTER 11 BANKRUPTCY FOR SMALL BUSINESS OWNERS AND INDIVIDUALS
Both companies and individual business owners can file under Sub Chapter 5 of Chapter 11 bankruptcy provided their debt does not exceed $2,725,625.00 and most of it was accrued for commercial or business purposes. Once again, we believe that during the COVID-19 pandemic that many businesses will take advantage of this opportunity. The major changes to Chapter 11 bankruptcy effected February 19, 2020 are as follows:
- Less creditor involvement
- Appointed trustee; the Court will designate a trustee to help facilitate and direct the dissolutions, but most cases, the debtor will still retain full control of his/her business.
- Use of all disposable income; the debtor’s repayment plan will range from 3 to 5 years and the court will require you to use all disposable income to make payments.
- Elimination of the absolute property rule; previously, you would not have been able to keep your assets unless you paid your creditors in full. With the elimination of this rule, you have a much higher likelihood of retaining your ownership interest.
- Possible mortgage adjustment; if you have the mortgage of your primary residence in connection with your business, you may be able to adjust the loan amount, interest rate or maturity of that loan.
Bankruptcy offers a host of benefits that many small businesses could not previously have access for one reason or another. Now, the Small Business Reorganization Act of 2019 presents an unprecedented solution for small business debtors who meet the requirements for Sub Chapter 5.
Oppenheim Law | Bankruptcy Attorneys
2500 Weston Rd #404
Fort Lauderdale, FL 33331