Typically filed by corporations and partnerships (though in some rare cases by individuals), chapter 11 bankruptcy allows businesses with an unsustainable debt burden to propose a plan in which their debt is reorganized and restructured, so that they can eventually return to profitability. If the plan is accepted by the bankruptcy court as compliant and viable, it is executed and monitored accordingly.
As with all other types of bankruptcy filings, there are pros and cons of declaring chapter 11 bankruptcy. We focus on each category below:
Advantages of Chapter 11 Bankruptcy
- Filing for chapter 11 bankruptcy immediately establishes an automatic stay. Creditors must cease all collection activity, including proposed and commenced lawsuits.
- The debt reorganization plan usually includes reduced amounts owed and/or reduced interest rates, which ultimately means that debtors pay less.
- Although they are obviously unhappy with receiving less than the full amount owed to them, creditors are generally receptive to the debt reorganization plan — especially since they are likely to get more than under a chapter 7 bankruptcy filing (a.k.a. liquidation bankruptcy).
- As noted above, during the execution of the debt reorganization plan a business remains operational, and can honestly and in good faith communicate to concerned customers, suppliers, vendors, and other stakeholders that they plan on re-emerging from bankruptcy vs. are preparing to wind down the business.
Disadvantages of Chapter 11 Bankruptcy
- Relative to chapter 7, the chapter 11 bankruptcy process is longer, more complex, and costlier due to additional filing, plus administrative and legal fees.
- The court will reject a proposed debt reorganization plan if it determines that it is not viable, compliant, realistic, and if there is no reasonable expectation that a business can return to post-bankruptcy profitability.
- The court may impose restrictions on the compensation of a debtor’s “insiders” (e.g. officers, directors, major shareholders, etc.).
- If the debt reorganization plan is accepted, during execution a debtor will need to seek the court’s approval to perform activities that are deemed outside the ordinary court of business. (With this being said, if the requested activities are justifiable in light of the goals and objectives of the plan, then they are likely to be approved.)
To learn more about the pros and cons of chapter 11 bankruptcy, and for a confidential consultation on whether filing is in your business’s best long-term financial interest, contact the Law Office of Charles H. Huber today. Our experience is your advantage!