July 23, 2019

Chapter 11 Bankruptcy Primer, Part 1 of 2

When filing for Chapter 11 bankruptcy protection, the organization has to see a "way out" of the reorganization. Frugality is important, but not a strategyChapter 11 bankruptcy cases by large corporations make the news more frequently than smaller companies using Chapter 11, leaving some business owners and nonprofit organizations like churches wondering whether Chapter 11 is an option for them.

Chapter 11 is not as straightforward to explain as Chapter 7 or Chapter 13, so I wrote this white paper on Chapter 11 and designed this FAQ:

Q: How “big” does the owner’s business have to be to even consider Chapter 11?

A: I cannot quantify how big a debtor should be in a Chapter 11. I have filed Chapter 11 cases for a number of individuals in the last five years, so it’s more a question of assets (including revenue stream).

Liabilities can also come into play; there are unsecured and secured debt limits on eligibility to be a Chapter 13 debtor, so sometimes that must be factored in and may make a Chapter 11 case more appropriate.

Everything is a very fact-specific, case-by-case analysis.

Q: How much does it cost to file a Chapter 11 case?

A: Chapter 11 cases are costly. The filing fee alone (what’s paid to the court at the time of filing) is$1717, compared to $310.00 for a Chapter 13 and $335.00 for a Chapter 7.

In addition, I handle Chapter 11 cases on an hourly basis, as do most experienced Chapter 11 attorneys. It is impossible to predict at the time of filing how much time will be spent by the attorneys throughout the case, because there are so many variables. However, at a minimum, my attorneys’ fees and expenses for a Chapter 11 are rarely less than $20,000.00, and in some instances, are significantly higher.

Q: What usually disqualifies a business for consideration as a Chapter 11 case?

A: If the business has stopped operating, or has no assets, then there is no point in attempting reorganization. Also, I discourage single asset real estate debtors, such as a corporation that owns an apartment building,  from Chapter 11 if they have been unable to secure (re)financing after giving it their all.

Chapter 11 can do lots of things, but it can’t raise capital or force financing that doesn’t exist.

Q: Who shouldn’t even bother asking for representation for Chapter 11?

A:  People who aren’t comfortable with transparency, because bankruptcy requires full disclosure of financial affairs.

People who can’t trust their attorneys, because we need free and full communication with our clients in order to represent them.

People who can’t listen, aren’t open to new ideas and ways of doing business, and/or can’t take advice – entrepreneurs, especially, tend to be risk-taking cowboys. If it works, great, but if Chapter 11 is on the table, then some things need to change.

Stay tuned for Part Two of this series.

The only way to understand your bankruptcy options is through a bankruptcy counseling session with a qualified bankruptcy attorney.