CHAPTER 11 SECTION
If your business is struggling because significant outstanding debts are no longer manageable, filing for Chapter 11 bankruptcy protection may offer a path toward cutting debts down to a manageable size and saving your business. In a Chapter 11 bankruptcy, you may be able to restructure your business finances and reduce your debts.
A Chapter 11 case begins with the filing of a petition in bankruptcy court. Generally, Chapter 11 cases are voluntary, meaning that it is the business owner, not creditors, who takes the initiative and secures Chapter 11 bankruptcy protection. Upon filing the case, a reorganization plan is usually proposed within approximately four months. A Chapter 11 reorganization plan is, in effect, a contract between the business and its creditors as to how it will operate and pay its obligations in the future. Most plans provide for at least some downsizing of the debtor’s operations to reduce expenses and free up assets. In some limited cases, for business that may no longer be viable, a “liquidating plan” can be proposed to provide for a conclusion of operations and the orderly sale of business assets.
Confirmation of the Chapter 11 Plan
Approval of a proposed Chapter 11 reorganization plan is referred to as “confirmation.” Ultimately, confirmation of a proposed plan rests with the bankruptcy court. To confirm a Chapter 11 plan, the bankruptcy court must find that it meets various requirements, including:
- Feasibility: The bankruptcy court must find that the proposed plan is feasible, or in other words, likely to succeed. The business debtor must establish that it will be able to raise sufficient revenues over the plan term to cover its expenses, including payments to creditors.
- Good Faith: The court must find that the plan has been proposed in good faith and not by means forbidden under applicable law.
- Best Interests of Creditors: For a proposed plan to be confirmed, it must be in the best interests of its creditors. In Chapter 11, the “best interests” test requires that creditors receive at least as much under a proposed plan as they would if the debtor’s case were converted to a Chapter 7 liquidation. In some cases, the “best interests” test requires the debtor to pay all of its creditors in full. Most Chapter 11 debtors, however, are financially underwater and can meet the “best interests” test by paying creditors only a fraction of what they owe.
- Fair and Equitable: The plan also must be “fair and equitable.” This often means that secured creditors must be paid at least the value of their collateral. Moreover, the business owners may not retain anything on account of their equity interests unless all obligations are paid in full, either immediately upon plan confirmation or over time (and with interest). The bankruptcy court can allow equity holders to retain ownership interests in the debtor in exchange for “new money” contributed to pay reorganization expenses. Otherwise, equity holders may lose all ownership rights upon plan confirmation.
After a reorganization plan is confirmed, a business will be discharged from all debts that are filed in a bankruptcy plan. Once confirmation occurs, a filer’s property is generally considered free of any encumbrances and liens. It is critical that both the person filing for bankruptcy as well as creditors follow the repayment conditions.
Chapter 11 Benefits
A Chapter 11 bankruptcy can help to preserve and protect a struggling yet viable business. Upon filing, the automatic stay protection under Section 362 of the Bankruptcy Code shields a business from harassing creditor collection efforts, including lawsuits. Business owners can continue operations as they restructure and pay off manageable debts.
If you are considering a Chapter 11 bankruptcy and need assistance, call us at (925) 385-8586 to schedule a consultation with our bankruptcy attorney.