Your business can run into hard times for a variety of reasons. Sometimes, it’s just not a viable business and it’s probably best to just close it down. But if you know that you have a good business plan, a solid market and the skill and knowledge to make it work, but are facing a temporary cash flow challenge or simply need to restructure, bankruptcy can help you get relief from creditors and take the steps to rescue your business.
Business Reorganization under Chapter 11
If you want to keep your business in operation, you can file a petition under Chapter 11 of the Bankruptcy Code. The business owners can continue to operate under bankruptcy court and more loosely under creditor supervision until the business is sold, a reorganization or liquidation plan is approved, or until the case is dismissed or converted to a Chapter 7 liquidation. Chapter 11 is intended to allow businesses in financial trouble to try to preserve or recover value that would not be there if the business simply shut down or was liquidated in Chapter 7.
Once a Chapter 11 bankruptcy petition is filed, creditors are prohibited from calling, writing, filing suit or engaging in legal action to recover a debt, except through the bankruptcy proceeding. In addition, while the reorganization plan is being worked out, the business may not be required to pay all its outstanding debts, allowing the business time to gather resources to move forward. In most instances, the owners of the business are allowed to continue to operate the business during the formulation of the reorganization plan. However, the bankruptcy court will typically prohibit certain actions without its approval, such as:
- Sale or purchase of assets, other than in the ordinary course of business
- Continued use of cash, accounts receivable, or other “cash collateral” which has been pledged a collateral under a loan agreement. These arrangements are quite typical. In this situation, you will need to get the lender’s consent or court approval as the first order of business. This will require showing that you can make ends meet and possibly turn a profit.
- Hiring or paying attorneys, accountants or other professionals without getting court approval
- Paying back salary or wages, or other debts owed when the bankruptcy is filed. This is usually part of what we call the “first day” motions.
- Entering into new loans or secured financing agreements, such as mortgages, or new financing.
Promptly after a Chapter 11 filing, the United States Trustee will schedule a meeting with the business owners and the bankruptcy attorney. The UST will require proof that all taxes are being paid, that required insurance is in place, and will investigate whether the Chapter 11 has a reasonable chance of success.
In a Chapter 11, the business is under constant scrutiny. Accurate books and records need to be maintained. Monthly operating reports need to be filed. Many other requirements need to be met. Many deadlines to act come into play. The first 2 weeks of a bankruptcy are a very busy time and the demands on counsel and management continue after that.
Having an Exit Strategy
In a Chapter 11 bankruptcy, you have various “exit outcomes”. Given the expense of these cases, having an exit strategy up front is very important. Do you want to run the business for a short while to finish up profitable contracts or find a buyer for it as a “going concern”? Or do you want to reorganize, and exit bankruptcy with a new set of restructured debt obligations under a Reorganization Plan?
Is it worth it?
Chapter 11 bankruptcies are always far more expensive that other types of bankruptcy. Failure can leave the business and its owners worse off than if they had not filed. You need to plan and realistically assess the “cost of winning” against the expense and risk. Chapter 11 when successful can save viable businesses, pay creditors more than if the business just shut down, and save employees’ jobs. Failure can leave a pile of new debt, some of which may have to be paid by the business owners.
The Reorganization Plan
Reorganization is one Chapter 11 outcome. Basically, the debtor (business owner) works with legal counsel to put together a proposed plan to restructure business operations. The plan must be approved by creditors and by the court. As a general rule, the debtor has the exclusive right to submit a reorganization plan during the first four months after filing. This time can be and will usually be extended, but Once that period is over, creditors may propose their own reorganization plans. Creditors may also ask the court to convert the Chapter 11 to a Chapter 7. There are many tests that must be passed to get a plan confirmed. In the end, success is often a product of careful and skillful negotiation to demonstrate to creditors that they are better off with the company “alive rather than dead”
Chapter 11 is far more complex than this brief summary. But for the right business or individual it may be well worth the effort.
Contact Neuner & Ventura, LLP
At Neuner & Ventura, LLP, we provide a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. To set up an appointment, call our office at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.