We often think of bankruptcy as the final or last alternative for a struggling business that can no longer meet its financial obligations because of poor management, a lost customer base, disastrous decision-making or unexpected events that led to a substantial outlay that crippled business operations. But bankruptcy can also provide some businesses relief from unrelenting creditors, lawsuits and collection activities that can cause a business to lose its assets and eventually succumb to the financial realities.
Most businesses have three options when considering filing for bankruptcy. A Chapter 7 is for liquidating the company’s assets and dissolving the business. A Chapter 13 is for a business that wants to continue operations while paying its creditors over a 3 or 5 year period depending on its income relative to that state’s median income. It is only available to individuals or sole proprietorships since a corporation or LLC may only use Chapter 11. Individuals, corporations, partnerships or unincorporated small businesses may use Chapter 11, which is similar to a Chapter 13 in that a repayment plan is submitted along with a plan for restructuring the business.
Here are 4 reasons why a Chapter 11 bankruptcy can help your business recover:
- The Automatic Stay. When a business or individual files for protection under any bankruptcy chapter, an automatic stay immediately goes into effect so that any court actions or collection activity, including phone calls and seizure of assets, must cease. This gives the debtor business a huge sense of relief since much needed energy and resources can now be directed at implementing steps to make the business profitable.
- Restructuring the Business. Your business may be able to remain viable if its revenues will be higher than the liquidation value of its assets. A restructuring can include voiding leases or other contracts that are dragging the business down and renegotiating them. It can also mean laying off employees, opening up negotiations with unions and closing some locations. However, major business decisions such as buying another company, selling off part of the business or a major asset cannot be done without court approval. Also, if the trustee feels the company has been grossly mismanaged or there has been fraud, the trustee will take over the business operations.
- Small Businesses Have Special Treatment. As a small business debtor, such as a small corporation, partnership or sole proprietorship, there are provisions that make Chapter 11 less expensive and a little simpler. To qualify, the small business debtor must be engaged in a business activity that does not primarily involve owning or operating real property unless it just a single real estate asset and who owes no more than $2,490,925. There is also no creditor’s committee, which would ordinarily be costly and could interfere with the continuation of the business operations. The small business debtor also may not have to file a disclosure statement and has an additional exclusivity time of 180 days and up to 300 days, rather than the standard 120 days, to submit a repayment plan before creditors can submit their own plans. This helps to expedite the bankruptcy process.
- Access to Financing. Businesses that file under Chapter 11 might obtain access to financing that would not otherwise be available. Some lenders specifically seek out companies that have filed Chapter 11 to offer terms for financing. Post-petition creditors can provide unsecured credit who are given administrative expense priority that is superior to all other administrative expense claims. These creditors will seek protection by securing a lien that is equal to or senior to an existing lien, called a priming lien. To obtain one, the debtor in possession has to prove to the court that the existing lienholder will be adequately protected after the lien in granted. The lienholder may seek relief from the automatic stay so that it may pursue its remedies should the case be converted to a Chapter 7 or is dismissed.
Before you consider Chapter 11 for your corporation, LLC or small business, consult with a knowledgeable bankruptcy attorney to see if a Chapter 11 is a viable option for your business to continue operating.