Chapter 11 Bankruptcy
Chapter 11, or the "corporate bankruptcy," allows struggling businesses to reorganize their debt and tread the water until economic conditions improve. As a Bankruptcy Attorney, I often hear this line from my individual clients: "Trump filed for bankruptcy, so I guess everyone's done it." Of course Donald Trump has never personally filed for bankruptcy. However, his companies have filed four times for protection under Chapter 11. The corporate reorganization can be a useful tool for any company that is struggling to service its debt, but maintains a revenue source.
What Kind of Company Files for Bankruptcy?
The answer won't surprise you - any type of company can, and does, file for protection under Chapter 11. In fact, even some human beings file under Chapter 11. People with secured debt that exceeds a million dollars can file under Chapter 11. However, it is generally reserved for corporations that either have a positive revenue stream and turn a profit, or have the potential to turn a profit in the future, or have a sizeable amount of assets and equity in those assets.
What Are the Benefits of Chapter 11?
First and foremost, the immediate benefit of a Chapter 11 filing is the same as any other filing - the automatic stay. An automatic stay is an injunction imposed by the federal Bankruptcy Court, and it operates to stop adverse actions against a company's assets. Adverse actions include seizure of property, Sheriff's sales, eviction actions, mechanic's liens, and so forth. Although bankruptcy should be considered long and hard before filing, many bankruptcy attorneys have had the eleventh hour meeting with the CEO of a company that is about to go under and needs to file for protection immediately. As with the doctor, it is best to visit your bankruptcy counsel early. Thus, a Chapter 11 filing buys invaluable time.
After the case is filed and the automatic stay takes hold, the company gets some breathing room. This is the secondary benefit of bankruptcy. The company can now take stock of where it is financially, and forge a plan going forward. That plan can include the assumption of favorable contracts and leases, and the avoidance of unfavorable ones. For example, if a company is stuck in a warehouse that is too large for its purposes because its business has shrunk, but it cannot get out of the lease, Chapter 11 would allow it to avoid that lease and move into a more favorable location.
Lastly, the Chapter 11 bankruptcy allows for a reorganization of debts.
What are the Drawbacks?
Upon filing for Chapter 11, the Bankruptcy court expects transparency in exchange for the benefit of the automatic stay. That means that the company is now financially monitored by the court. This happens right away when all the company's bank accounts must be closed, and a special debtor in possession account is opened. That account is essentially monitored by the courts through the US Trustee's office, and the company has the responsibility of providing those statements to the court at any given time.
Moreover, the company must file monthly reports with the court detailing its exact financial picture. The reports must be prepared by a qualified accountant, and they must include information about accounts payable, accounts receivable, profits, losses, and activity in the DIP account.
How does Chapter 11 work?
Upon filing of the bankruptcy petition, the company must pay the filing fee of $1,717.00. It must also remit quarterly fees to the Trustee based on the size of the company and the number of creditors. The Debtor must then open a DIP account, and supply monthly statements regarding its finances. The Debtor will then draft a Chapter 11 plan to propose payouts to its creditors over a given period of time. Creditors then vote to either accept or reject the plan. If the creditors accept the plan by a majority (the exact mechanics are more complicated), the plan is confirmed. If the plan is not accepted, the Debtor must either redraft it, or force it through over the creditors' objections. Upon confirmation of the plan, the Debtor must make payments to the creditors according to the Chapter 11 plan.
Choose an Experienced Chapter 11 Attorney
It goes without saying that you should not attempt managing a Chapter 11 filing without the assistance of competent and experienced counsel. The Federal Rules of Civil Procedure and Bankruptcy Procedure are dense, and should be parsed by experienced counsel. Give us a call today to discuss how Chapter 11 can benefit your company.
This content was written on behalf of Greg Prosmushkin.