Chapter 11 Bankruptcy

A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a reorganization bankruptcy. It is designed for businesses in distress that nonetheless want to keep operating. Its leaders will have determined they need more time to restructure their finances in order to pay outstanding bills.

A clear exit strategy often drives a Chapter 11 case and provides comfort to creditors, customers, employees, and other parties in interest. A clear exit is most important in smaller Chapter 11 cases because they are typically more sensitive to the disruption and costs that can result from a bankruptcy filing. Large Chapter 11 debtors usually file for bankruptcy with an exit strategy even though these cases are more likely to succeed even without one. This will be true because the parties have too much at stake, too much to lose, to let the debtor fail outright.

Reasons for the Chapter 11 restructuring:

  • Too much debt
  • Not enough liquidity
  • Industry and / or company in decline
  • Mismanagement and / or fraud
  • Catastrophic event
  • Preservation and / or maximization of value
  • Strategic reason
  • Effectuate a transaction
  • Reject leases
  • Deal with labor

 

The benefits of a Chapter 11 bankruptcy process are to provide a debtor with breathing space from litigation and collection actions. There is an “Automatic Stay” under Section 362 of the Bankruptcy Code that stops all foreclosure actions and lawsuits upon the filing of a Chapter 11 petition. Filing gives the debtor time and ability to restructure its balance sheet and business.  Filing can facilitate access to working capital through DIP loan financing. In short, the business – through this legal action – gains time to pay bills, rejuvenate their revenue streams, perform internal reorganizations.

Bankruptcy is filed in the state the business is domiciled or registered. Chapter 11’s are generally for businesses with either too much debt or too much income to qualify for a Chapter 7 or Chapter 13 bankruptcy.

While planning the exit strategy in advance of filing a Chapter 11 is important, the initial strategy may change after the debtor files the case. The debtor’s preferred outcome may not be the outcome its creditors or other parties with an interest prefer or impose. A successful reorganization is most likely to occur when the debtor has analyzed its exit options before filing the case.

There are many questions a business will need to consider before moving into a Chapter 11 filing. The length of the proceedings can be from months to years and need careful tracking. The bankruptcy court must approve such business transactions, including but not limited to:

  • Exceptional sale of assets
  • Secured financing arrangements that allow the debtor to borrow money after the case is filed
  • Shutting down or expanding business operations
  • Entering into, modifying or breaking contracts, leases and agreements

Thus, as with most corporate matters, any corporation considering bankruptcy should consult with a qualified Chapter 11 bankruptcy attorney and tax professional to get advice customized to the corporation’s particular situation and needs.

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