Can a Business Survive Chapter 11? As a struggling business owner, you want to keep your doors open, preserve your legacy, and save the jobs of those who are dedicated to your company.
So, when you start considering bankruptcy to get out from your business debts, you may wonder if your business will survive the process.
Chapter 11 might sound scary, but in reality, it is an ideal solution for a business that wants to file for bankruptcy without closing their doors and liquidating any assets they have.
What makes Chapter 11 unique is that it is a reorganization of your existing business debts. You cannot make your debt obligations as it stands now. But with Chapter 11, you can find a new solution so that you can continue working, make money, and eventually get out of debt.
In most cases, businesses survive Chapter 11 and go on to be thriving, highly successful corporations.
What ensures that your situation is successful is a combination of factors, including hiring the right bankruptcy attorney, following the repayment plan required by the courts, and not continuing to accrue debts that only puts you back into the same situation as you were before.
Chapter 11 Provides Business Owners with Creditor Protection
The most significant advantage to Chapter 11 is that you gain protection from creditors and their attempts to collect a debt. No more collection notices or threats of liens. Instead, you have the protection of the automatic stay and bankruptcy courts.
While you are under protection, you work with your attorney and the courts to create a reorganization plan and a reliable method for repaying most of your outstanding debts.
How Can a Business Survive Chapter 11?
If you would like to go through Chapter 11 with a 100% guarantee, you will not find that. But there are things you can do to limit the risk your business would end up needing to liquidate. Some ways that you can protect your business include:
Continue Business as Normal
When you file for Chapter 11, you are unlikely to have a trustee assigned to your case. Instead, you operate your business as usual, but you have the status of a “debtor in possession” while you repay your debts. It is essential that you follow any limitations and restrictions.
While you run your company, you cannot accrue new debts and you must be cautious about any investments or significant changes in your company. Doing so without the court’s authorization may trigger a hearing. Likewise, if the court feels you cannot run your business adequately, they will then appoint a trustee to oversee operations. At this point, you lose control to the trustee until you complete your repayment plan.
Trustee assignments are rare, but they do happen. You may have a trustee appointed in your case if fraud, incompetence, or gross mismanagement issues arise during your bankruptcy case.
Realize You Run Your Business, but Have No Control
Day-to-day operations are yours, but the court will want a final say in more significant decisions, such as:
- Selling any assets, including real property. You can continue to sell your inventory items if that is part of ordinary business operations.
- Entering into a lease or breaking an existing lease.
- Borrowing money after the case has been filed.
- Shutting down your operation or making expansion purchases.
- Entering into a contract or agreement with a vendor, licensing bureau, or another official contract.
- Retention of any fees or payments to attorneys and professionals.
Follow the Reorganization Plan
While you can remain open, the court is likely to request that you sell some assets or downsize to ensure that you are not beyond your means and to free up some money for paying debts down. Do not attempt to hide business assets so that you can avoid selling them. This will most likely result in a dismissal.
Be Fair and Reasonable
When you draft your plan, you should work with an attorney that has experience specifically in Chapter 11 reorganizations. You will need to be fair to your creditors. Offering them 10 percent of what you owe will not satisfy the creditor or the courts. Instead, you must have a reasonable, equitable plan that considers the best interest of the creditors.
The creditors should receive as much under your plan as they would if your company liquidates.
Pay on Time
You cannot violate the terms of your bankruptcy plan, or you will suffer dire consequences. You must meet all payments on time per the court’s requirements. If you reach a point where you cannot make a scheduled payment, contact your attorney immediately.
Does Chapter 11 Work?
In most cases, it works great for companies that want to stay in business. However, not many companies make it past the reorganization because they are reaching further than their company’s income can grasp. That is why it is imperative that you speak with a bankruptcy attorney. An attorney will review your financial situation and explore all bankruptcy options. Even though you want to keep your business open, it may not be financially feasible. You need an attorney to make sure your plan would succeed in court.
Schedule a Consultation with Our Bankruptcy Team Today
If you are considering Chapter 11, discuss it further with our business bankruptcy team. We will review your current financial situation and explore all options. Then, we will help you pursue the bankruptcy option that is right for your company and feasible, given the circumstances.