We hear about big companies in the news dying via bankruptcy, and look to see if we can scavenge some retail goods at a “Going Out of Business” sale, but Chapter 11 bankruptcy is not simply the realm of zombie enterprises and creditors hassling them enough to be La Llorona. Rather, in a Chapter 11 bankruptcy, the debts can get interred while the company saves itself from the grave. Here, we provide answers to frequently asked questions (FAQs) about the Chapter 11 bankruptcy process.
Is My Business Eligible for Chapter 11?
Most businesses are eligible for Chapter 11 (save banks, insurance companies, and certain investment entities). A business does not need to be on life support to file, as insolvency is not a requirement. The business prepares a voluntary petition and submits the required fees, and then prepares and files others disclosures relating to its debts, assets, and financial history post-filing.
What Sort of Income Is Required for Chapter 11?
While insolvency is not a requirement, a Chapter 11 reorganization needs funding to hold back vampires. Lawyers need to be paid, both for the debtor company and for an unsecured creditors committee (if one is formed by the Office of the U.S. Trustee). A bankruptcy also does not stop debts from coming due going forward: pre-filing debts are stayed and held at bay, but post-filing debts incurred in the regular course of business generally get paid in the regular course of business (or sometimes cash on delivery). In terms of a reorganization plan, it needs to provide for more value to go to the creditors than they would get if the business were liquidated in a Chapter 7 bankruptcy and laid to rest. This value often comes from business operations, sale proceeds, or outside funding, although the source of that funding must be disclosed rather that simply mysteriously appear as if by magic.
What Happens When a Business Files for a Chapter 11?
Once a business files its petition, it transforms to gain new powers. Pre-petition creditors generally find themselves ensorcelled by the automatic stay from enforcing their rights outside the bankruptcy process, while the debtor company can now determine what existing executory contracts it wants to keep and throw into its cauldron. The business still operates with its existing management in the ordinary course, but non-ordinary conduct – such as doling out tricks rather than treats to neighborhood ghoulies – must be first presented to the Bankruptcy Court. Separately, all debtors come under the eye of the U.S. Trustee, which reviews filings and interviews debtors to ensure compliance with the Bankruptcy Code. The U.S. Trustee may also appoint an unsecured creditors committee made up of pre-petition creditors, which will try to negotiate better outcomes for those creditors than meeting the grim reaper.
How Does a Business Get Out of Chapter 11?
To the uninitiated, a bankruptcy can seem to have no way out, at least not back to the land of the living, but the ability to reorganize lies at the dead center of Chapter 11. Before a business makes final arrangements for the filing, it should have come to a sixth sense about a reorganization plan. In other words, while a debtor has 120 days during which only it can file a plan, it should still go into the process having thought about what offerings it will make. Creditors may have different rights depending on their collateral and type of debt, rather than simply always being an undifferentiated horde. This reorganization plan will spell out which parties receive what, and where that funding will come from. The plan has various requirements to be confirmed, including that it pays more than they would be bequeathed in a liquidation and that it be feasible. Chapter 11 reorganizations can become quite complex, and a business should consult with a qualified bankruptcy lawyer to see if a reorganization can save it from an untimely demise.