Before you consider filing for Chapter 11 bankruptcy protection for your corporate business, there are a number of things for you to consider before taking this major step:
What is your purpose in filing for Chapter 11?
Before you file under this chapter, have your business evaluated to see if it can be saved or has a reasonable opportunity for future profitability if the corporation’s debts are reorganized, meaning a reduction in principal or interest rate or stretching the payments out over several months or years. Also, if the business is tied down with union or other contracts including leases, is it realistic to renegotiate these contracts on more favorable terms?
Have a plan in place
If you do file for Chapter 11 protection, you will need an acceptable plan that is reasonable and will lead to the corporation’s eventual emergence from bankruptcy protection. You should arrange for financing for the proceeding, which can cost over $100,000 in some major cases, as well as future financing for the reorganized company. Without a promise of financial backing, it is unlikely your plan will be approved. You must also have assurances from creditors who are willing to accept reduced payments or a repayment plan.
In a Chapter 11, before the debtor company can use its cash or funds from its accounts receivable or sale of its inventory, the court must be assured that the use of these assets will not cause a creditor’s secured position to suffer.
Are your personal assets at risk?
Although by incorporating, you are limiting your personal liability, you may have loans to the corporation that have personal guarantees, such as an SBA loan. These loans allow creditors to seek and obtain judgments against you personally and to go after your home or other assets if the business becomes insolvent. If so, you may have to file an additional petition under Chapter 13 or Chapter 7. Consult an attorney before you file.
Your control of the business will be limited
Under Chapter 11, you may have some decision-making power but any decisions affecting the company must be approved. If the appointed trustee determines that the company was badly mismanaged or finds evidence of fraud, the trustee can take over the operations.
Major decisions that the court must approve include shutting down of certain business operations including stores, renegotiating contracts and licensing agreements, securing financing arrangements and the sale of any assets.
Chance of Success
Consider that the majority of Chapter 11 cases do not result in a profitable enterprise with most converted to a Chapter 7 upon court approval. Before you spend a considerable amount of time and money filing for Chapter 11, consult with an attorney and financial analyst regarding the future prospects of your corporation.