June 24, 2019

Chapter 11 Bankruptcy Primer, Part 2 of 2

Chapter 11 bankruptcy protection may be the only way to prevent a business closureWhile Chapter 11 bankruptcy is not as frequently employed as Chapters 7 and 13 it is appropriate in some circumstances. This post, along with the first part in the series, will answer many frequently-asked questions about Chapter 11.

I also recommend downloading my guide to Chapter 11 here.Download your copy without registering. Just click.

Q: What questions do I ask a prospective Chapter 11 client to determine whether they should “collapse the company” or restructure in Chapter 11?

A: I start by asking about the assets and liabilities of the company, whether the business is currently operating and if so to what extent, and what it would take for the company to (1) break even and (2) be profitable.

Sometimes, it is immediately obvious that the business simply needs to close, and the owners need to focus instead on their finances and find a new line of work. For example, if the business sells widgets, and has not sold enough widgets for the past year or two to pay its overhead, then no reorganization is going to save the business.

Before discussing for whom the strategy known as “Collapsing the company” is appropriate for, let’s define “Collapsing the company.” When a closely-held corporate entity transfers its assets and liabilities to the owner(s), usually a husband and/or wife, and then the individual(s) file for Chapter 13 and do business as sole proprietor(s), that’s one way to collapse the company.

This strategy is appropriate only for small businesses, what we think of as mom and pop businesses. The strategy will not work where there are multiple owners or shareholders, or where the owner(s) personally have significant assets that they would lose in a personal bankruptcy case.

Q: What other types of entities can consider Chapter 11 bankruptcy? Can a non-profit file for Chapter 11 bankruptcy?

A: Corporations (including LLCs), partnerships, individuals, and individuals doing business can all be a debtor under Chapter 11. This all includes both for-profit and non-profit organizations. Restaurants, retail businesses, golf courses, real estate developers, consultants, churches, and manufacturers have been debtors in the Western District over the years, and none of them infrequently.

Q: What advice do you usually give to prospective clients when Chapter 11 isn’t viable for them?

A: It depends on whether the financial problems are limited to the business, or spread to the owners; also depends on whether the entity wants to try to continue in business or not.

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