How Businesses Navigate Chapter 11 Bankruptcy

Unfortunately many businesses face times of serious financial struggle where they are struggling to pay back creditors but forecast stronger revenue streams on the horizon.  In these cases the business needs a means of getting to those futures and a Chapter 11 bankruptcy may be the preferred option.

Businesses are often hesitant to begin the Chapter 11 filing process because of the stigma and complexities, but it does provide a way for the business to get through challenging economic times and continue operating after bankruptcy.

What Does Filing for Chapter 11 Bankruptcy Entail?

Unlike other forms of bankruptcy, Chapter 11 does not completely erase the debt of the business or its ownership. Instead, the debt is restructured into a new payment plan that is more easily managed by the business. The business must have a solid repayment plan designed and approved by the bankruptcy court in order to have the case approved.

This plan must clearly show how the business plans to repay its creditors in the future. This can also include modifying the existing payment terms on outstanding contracts. Many businesses filing for Chapter 11 will also scale down the business and sell off some assets in order to pay back portions of the debt.

Special Requirements for Small Businesses Filing for Bankruptcy

The rules and requirements faced by a small business debtor filing for Chapter 11 can be somewhat different than those required of larger companies. Those who are considered small business debtors are individuals who are engaged in business and owe less than $2,490,925. This amount of debt does not include funds owned to people who are involved in the business, such as business partners or family members.

The process can differ for small business debtors in the following ways:

Additional Reporting – While all businesses filing for Chapter 11 are required to have a plan for repaying their debt moving forward, small businesses are often subjected to even closer scrutiny. They may need to file more paperwork regarding the cash flow of the business and basic operations.

300 Days to Complete a Plan – Larger corporations have more leniencies when it comes to the time provided to construct a Chapter 11 plan. Small businesses often only have 300 days to provide a proposal to the courts. Some courts will provide extensions to this timeframe if the business can provide evidence that it will be possible to design a plan.

Creditor’s Committee – When larger businesses file for Chapter 11 bankruptcy, the courts will often require that a creditor’s committee be formed. This committee will consist of individuals who will represent the unsecured creditors affected by the case. This allows the best interests of the creditors to be heard. When the debtor is classified as a small business debtor, the courts may rule that no creditor’s committee is necessary.

Challenges with Chapter 11 Bankruptcies 

There are many different complications that can occur when filing for Chapter 11 bankruptcy. Oftentimes small and large businesses run into difficulty constructing an acceptable Chapter 11 plan that will be approved by both the board of directors of the company and the courts.

Another major problem with Chapter 11 bankruptcies is that they sometimes do not go according to the plan. If the company is not able to hit their projections, if they are not able to make their payments, or if they blatantly do not follow the plan that was approved by the courts, the bankruptcy could be transformed into a Chapter 7 bankruptcy. This would mean the end of the business.