Individuals who start companies with little business experience often find themselves overextended or with poorly negotiated contracts that leave them reeling in debt. Managing debt, following proper accounting principles, and collecting on accounts are vital to keeping any business viable and profitable.
Not all debt is a business killer – there are good and bad types of debt. Good debt refers to investment debt; such as loans on real estate or for the business that are tax deductible as well as produce wealth in the long run. Bad debt is recurrent, has a high interest rate, or is for disposable products that lose value. A poor business person is one with too much bad debt and at rates that are eating up whatever profits their business is generating.
When a business finds itself entrenched in poor debt management, with creditor claims that are threatening the business’ future and growth, then Chapter 11 may be an option. It is also a way of delaying debt payments while you seek financial help, renegotiate with creditors and possibly change business practices shown to be ineffective. If you or your company is in the southern California area, consult a Pasadena Chapter 11 bankruptcy attorney from the DCDM Law Group.
Automatic Stay Provision
Whenever an individual or business entity files for bankruptcy, the automatic stay provision of 11 U.S.C. § 362(a) goes into immediate effect. Any civil proceedings including litigation and collection activities must cease. The automatic stay stays in effect during the Chapter 11 proceedings until a reorganization plan is formulated and then approved by the creditors or the court rules otherwise.
Filing a Reorganization Plan
When filing under Chapter 11, the business entity, generally a corporation, becomes the debtor-in-possession (DIP) that has the powers of a fiduciary and that of the bankruptcy trustee except for its investigative powers. As DIP, it can account for property, object to claims and file informational reports with the court. It can also employ attorneys, appraisers and others to assist in the bankruptcy proceeding.
The DIP has 120 days to submit a reorganization plan to the creditors. In large cases, a creditors committee may be set up consisting of the seven largest creditors. Once a plan has been submitted, the creditors have 180 days to approve it. In some cases, the court can extend the approval time to 20 months. In the interim, the corporation is not paying any of the debt claim.
If the creditors do not affirm the plan, they can submit their own. In some cases, this process can take a few years. In the meantime, the DIP can continue to operate its business, restructure contracts and leases as well as renegotiate with creditors on more favorable terms.
Creditors are placed into classes depending on whether they are secured, unsecured or have priority status under 11 U.S.C. § 507(a). The proposed plan advises how the creditors will be treated. Each class of creditors votes on approval or rejection of the plan. If all but one class approves it, the corporation may be able to force the class to accept it.
Once a plan is approved, your company then begins to make payments to the creditors according to priority. This can take a number of years as well. Once the payments to the secured and then to the unsecured creditor class who have priority are satisfied, the remainder of the unsecured creditors will either receive a fraction of their claim or be discharged.
If your company is having debt management or other problems that are plaguing your business, consult with DCDM Law. Chapter 11 may be an option for you but first get sound advice from one of our attorneys before taking this step.