It is common for individuals to file for personal bankruptcy and companies for business bankruptcy when they cannot pay existing debts, either in part or in full. Individuals or businesses file for bankruptcy to discharge their debts. Bankruptcy provides debtors with a “fresh financial start” and aids creditors in establishing their rights.
There are several different forms of bankruptcy. The most common ones are Chapter 7, Chapter 11, and Chapter 13. If you aren’t sure which one to file in your case, speak with a bankruptcy lawyer.
What Is a Chapter 11 Bankruptcy?
Chapter 11 is a type of reorganization bankruptcy and is available to individuals, corporations, and partnerships. Chapter 11 is considered to be the most flexible of all of the bankruptcy forms. There are no limits on the amount of debt that can be handled.
Chapter 11 is the most common bankruptcy choice for large businesses that are seeking to restructure their debt to become profitable again. Chapter 11 bankruptcy allows a business with significant debt to reorganize its finances to eventually pay off its debts and be able to continue operating once the bankruptcy process is complete.
The process is initiated when the company files a petition for Chapter 11 with the federal bankruptcy court (all bankruptcies are federal, not state, matters). They are then given 120 days to create a plan to reorganize the business in a way that suggests the company will become profitable again. To make the business profitable again, the plan could involve closing segments of the business that do not directly generate revenue, such as advertising or research.
The restructuring plan must also provide details regarding how the business will pay off its creditors in the future. The creditors must approve this plan. Management may continue to run the business, but the bankruptcy court must approve all significant business decisions.
How Is a Chapter 11 Bankruptcy Different From Other Forms of Bankruptcy?
Chapter 11 bankruptcy can be more efficient than Chapter 7 bankruptcy, the second most common form of corporate bankruptcy. As such, it is helpful to understand how Chapter 7 works to determine how the two forms of bankruptcy differ and how they are similar.
Chapter 7 bankruptcy is also known as “liquidation bankruptcy.” It allows the debtor to “discharge” (essentially, cancel) all debts that can be legally discharged. Some debts, such as child support and taxes, cannot be discharged. The bankruptcy code provides specific rules regarding who qualifies, how to file for Chapter 7 bankruptcy, and what type of debts can and cannot be discharged.
In a Chapter 7 bankruptcy, a bankruptcy trustee is charged with the responsibility of selling off assets owned by the debtor. This is known as the “liquidation” of a business’ property to pay off its debts. Chapter 11 does not require the sale of property unless it is the only way to generate enough money to reorganize the company’s finances to pay off debt.
The Chapter 7 bankruptcy process begins when the business files a petition with the bankruptcy court. This petition must list the business’s property, debts, and recent financial history. As mentioned, the court then appoints a trustee who is responsible for selling off some of the business’ property to help pay the business’ debts. The trustee will discharge some debts, meaning the debts will not have to be paid in full. Once all debts are settled, the business will most likely cease to exist.
Chapter 7 bankruptcies tend to be more simple and quicker than a Chapter 11 bankruptcy and require as little as only one or two court visits to complete the process.
In comparison, if a business completes a Chapter 11 bankruptcy, it is more likely to continue operating in some capacity. No property must be sold to repay their debt, and no trustee is necessary. However, Chapter 11 bankruptcy tends to be a much longer process when compared to a Chapter 7 bankruptcy. Additionally, the process is more complex, and all debts must eventually be paid.
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What Steps Are Involved In Developing a Reorganization Plan? What Happens to Company Stock?
Chapter 11 bankruptcy cases require the debtor to form a bankruptcy reorganization plan. The purpose of this plan is to give a business more time to reorganize their finances in a structured manner so that they may pay off any debts still owed to creditors without having to either shut down their business or sell off large amounts of critical assets (e.g., equipment).
To create the reorganization plan, the company will create different committees so that it can get input from all of the parties that will be affected by the bankruptcy. There is a committee representing creditors; there is a committee representing shareholders or other investors, and given the facts, there may be other committees.
A Chapter 11 bankruptcy reorganization plan must be written in clear terms and with unambiguous instructions. As such, a debtor may want to consider hiring a bankruptcy lawyer to draft and review the final version of their plan before submitting it to the bankruptcy court for approval.
Some common issues that a bankruptcy reorganization plan should address in advance may include:
- Identifying the types of debt as well as the amount of each debt that still needs to be paid
- Identifying the names and types of creditors associated with each identified debt (e.g., secured creditors, unsecured creditors, etc.)
- Determining whether the identified debts need to be paid in full or in part (note that this is often left up to the bankruptcy court’s discretion)
- Citing the methods being used to pay off each of the various debts (e.g., whether debts will be paid off using a company’s future earnings or if the company may need to sell off some business assets for funds to satisfy remaining debts)
- Providing instructions on how an indebted business organization will proceed or operate in light of their newly restructured debts
- Determining whether a special committee will be formed to manage and execute the bankruptcy reorganization plan.
It should be noted that each bankruptcy reorganization plan will be tailored to the needs of an individual business. Thus, such plans will often vary by business and per the nature of a particular business’s debts.
Once the company has prepared a disclosure statement and reorganization plan, they are filed with the bankruptcy court. Creditors vote on the plan; if the vote passes, the bankruptcy court confirms the plan.
It is important to note that once the bankruptcy court approves the plan, it is considered legally enforceable in the eyes of the law. As such, a violation of a Chapter 11 bankruptcy reorganization plan can lead to serious legal consequences, such as:
- A creditor may be allowed to place a levy on the indebted business organization’s property or assets
- Dismissal of the Chapter 11 case
- Being ordered to pay off all leftover debts in full immediately
- Potential penalties
A company’s stock may continue to be traded even after the business has filed for bankruptcy. Although a company in bankruptcy may no longer be listed on a major stock exchange, its shares can trade.
When the company comes out of bankruptcy proceedings, it will have to issue a new type of common stock. The first class of stock is the old stock, which was on the market before the company filed for bankruptcy. The second type would be the new stock, which is issued as part of the company’s reorganization plan.
To denote if the old common stock was traded, there will be a five-letter ticker symbol ending in “Q.” This is intended to indicate the bankruptcy proceedings. The new common stock will have no such ticker.
Do I Need an Attorney for Chapter 11 Bankruptcy?
If you find yourself considering filing for corporate bankruptcy, you should consult with an experienced local bankruptcy attorney before proceeding. An experienced attorney can help you consider which type of bankruptcy would best suit your company’s needs and can also help you determine whether any alternatives to bankruptcy may be available to you.
Because state laws regarding bankruptcy vary widely, a local bankruptcy attorney will be most suited to help you understand your state’s specific laws and how those laws may affect your legal options.
Additionally, should you file for Chapter 11 bankruptcy, your bankruptcy attorney can help you begin the process and create a legally sound and enforceable reorganization plan. Your attorney will also communicate with creditors on your behalf and will represent you in court as needed.
