Updated: Oct 22, 2021
Many initial calls regarding a potential Chapter 11 business reorganization seek just the basic information: Does my business have to go out of business if it files bankruptcy? Can reorganization help my business resolve a particular debt or situation (i.e., unpaid withholding or sales taxes, judgments, collection efforts, commercial eviction, lawsuits)? What is Chapter 11 anyway? How much does Chapter 11 cost? How long does it take for a plan to be confirmed?
At its most basic principle, Chapter 11 reorganization is a way that a financially distressed business can obtain immediate and lasting relief so that it can keep operating and stay in business. As the name “reorganization” suggests, that financial relief comes in the form of reorganizing and restructuring debts and other liabilities. A confirmed Chapter 11 plan of reorganization can accomplish this in any number of ways, from restructuring financing terms to extend the payback period, reduce interest rate and bifurcate secured claims (i.e., principal reduction), to discharging or significantly reducing unsecured claims, to providing a five-year payback period for most tax liabilities, to halting lawsuits and administrative actions, to reinstating a suspended license and more. The favorable results that can be attained in a confirmed Chapter 11 plan of reorganization are open ended and limited only by the parties involved.
The Chapter 11 process starts by consulting an attorney as soon as the business finds itself in financial dire straits. Time is of the essence and non-bankruptcy options such as bank/creditor workouts or other out-of-court arrangements may be explored if time permits. However, Chapter 11s are often filed after such efforts fail or reach a standstill. At that point, the business can file Chapter 11 to obtain immediate relief in the form of the automatic stay prescribed under the Bankruptcy Code. At the moment of filing, the automatic stay puts an immediate moratorium on debt collection efforts, including the suspension of pending lawsuits, judgments, foreclosure, levies, etc. While the automatic stay will not permanently deprive all creditors from pursuing their legal remedies, it often is the curveball that has that result. The automatic stay provides the debtor with breathing room and time to consider new routes to improve business prospects. Moreover, Chapter 11 offers a new platform upon which to leverage legal possibilities that may not be available outside of Chapter 11 bankruptcy.
Once filed, multiple parties become necessarily involved in a Chapter 11 proceeding. Of course there is the Chapter 11 debtor and its attorney, and also the Office of the US Trustee—which is a federal office organized under the U.S. Department of Justice—which has the duty to monitor and participate in Chapter 11 proceedings as necessary to ensure the procedural process and certain mandatory reporting requirements are properly followed. It is also possible that a committee of the business’s creditors may be formed however this is somewhat less likely to happen in smaller cases. Additionally, a bankruptcy judge is assigned to the case who serves as the ultimate arbitrator over the Chapter 11 proceeding and all disputes, if any, that may arise between the debtor and other parties in interest.
During the course of a Chapter 11 proceeding, the debtor can expect to make several appearances before the judge and with the attorney for the Office of the US Trustee assigned to the case. The debtor can also expect to prepare and file detailed monthly financial reports of the business’s operations, and to participate in negotiations with key creditors. Chapter 11 requires the business to be an “open book” for the duration of the proceeding, and transparency in most areas of the business is critical to a successful Chapter 11.
The duration of a Chapter 11 proceeding can vary widely, with a simple uncontested case lasting a few months or more while a large business in an embattled case having multiple secured creditors and contested actions taking years to complete. An experienced Chapter 11 attorney can review the business’s circumstances, advise of the potential pitfalls that could arise to complicate a Chapter 11 proceeding, and provide an estimated range of attorney fees and other costs involved in Chapter 11 proceedings.
Lynn Wartchow provides initial Chapter 11 consultations to review the business liabilities and other circumstances affecting a possible Chapter 11 bankruptcy proceeding, and to advise on possible options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects.