May 28, 2017

Chapter 11 or 13 for Troubled Businesses ?

When you can't turn the business around, Chapter 11 reorganization might be requiredThis month news of an oil and gas producer filing for Chapter 11 bankruptcy protection made news. The reason cited for the financial difficulty is the drop in oil prices, which have have slid some 50 percent since June.

My Chapter 11 clients own small to mid-sized businesses, but they have the same problems as bigger companies who need to reorganize under the orderly process of a bankruptcy case.

Chapter 11 bankruptcy is a reorganization. While businesses, individuals and even non-profit organizations like churches  can file for Chapter 11, it is usually used by businesses.

Download this free guide to Chapter 11 bankruptcy. No registration required

Should I shut the business down or reorganize in bankruptcy?

Chapter 11 is an orderly process that allows the debtor time and space to reorganize its financial affairs and repay its creditors some or all of the debt owed. The key to deciding whether to reorganize a business or shut it down is whether the business is viable after reorganization.

If a business owner/manager comes to me because their business is struggling with because sales are down, their clients have off-shored, a new technology has taken their customers, and there is no light at the end of the tunnel, re-organizing the business is unlikely to help.

Common problems that lead to bankruptcy include the decline of the housing market, growth and expansion at a fast pace, embezzlement by an employee, a change in ownership or leadership, or a balloon payment due to a bank that is unwilling to refinance. Some of the company’s debts may be personally guaranteed by the individual owner(s).

Bankruptcy protection is definitely a preferred approach to haphazardly responding to creditor demands.

These clients often want to discuss filing a personal bankruptcy  in order to deal with their own debts, and also want to file a bankruptcy for their business in order to deal with the company’s debts.

Chapter 13 or Chapter 11?

Chapter 13 can be an alternative to Chapter 11 for reorganizing a small business that is a sole proprietorship or a mom and pop partnership. Chapter 13, if available for the debtor’s circumstances, can be a godsend to small companies as it is far less complicated and expensive than a Chapter 11 filing.

I designed this guide to Chapter 11 bankruptcy to help owners of small to mid-sized businesses begin the process of considering bankruptcy protection. We appreciate that it often takes time for business owners to face the process of winding down their businesses — businesses that feel like a child in some cases. Our advice is to read this guide, which will begin to prepare you for a bankruptcy counseling session.

Download this free guide to Chapter 11 bankruptcy. No registration required

What to expect when filing for Chapter 11 bankruptcy protection

  1. Once my office files the petition, debts that are included in the petition (known as “pre-petition debts”) must be handled through the bankruptcy court, and only by creditor contact directed to my office or the court. In other words, creditors can no longer contact the debtor directly regarding collection of those pre-petition debts.
  2. Within thirty days of the filing of the petition, a representative of the debtor must attend a hearing known as the first meeting of creditors. I attend this hearing with my Chapter 11 clients, and take an active role in preparing them for the hearing and representing them during the hearing. A representative of the bankruptcy administrator’s office asks questions about the petition, the debtor, and related issues. Creditors also have the right to attend and ask questions.
  3. Creditors have the right to vote to approve or reject the plan; however, the bankruptcy court has final approval over all Chapter 11 plans.
  4. There is a strong preference under the Bankruptcy Code for business owners and managers to continue to run the day-to-day affairs of the Chapter 11 debtor while the bankruptcy case is open. This is known as a “debtor in possession.” However, when this is impractical or impossible, the bankruptcy court can appoint a bankruptcy trustee to manage the business while the bankruptcy case is open.

Making the call to a qualified bankruptcy attorney’s office is often the most difficult step in the process. Your answers await.