Are There Advantages To Filing Chapter 11
The biggest advantage is that the entity, usually a business, can continue operations while going through the reorganization process. This allows them to generate cash flow that can aid in the repayment process. The court also issues an order that keeps creditors at bay. Most creditors are receptive to Chapter 11 as they stand to recoup more, if not all, of their money over the course of the repayment plan.
Chapter 11 Bankruptcy Vs Chapter 7
Chapter 11 bankruptcy allows a business to continue its operations while paying off its debts. This is in contrast to chapter 7 bankruptcy, also known as liquidation. In chapter 7, a business or individual sells off assets and uses the proceeds to pay debts. For a business, however, this often means ceasing operations.
Preservation Of Certain Legal Rights And Actions During The Case
The Bankruptcy Code preserves certain legal rights and causes of action for the Debtor filing for bankruptcy protection.
The automatic stay may bar the termination of an existing contract even where it has been a pre-petition breach by the debtor.
Statutes of limitation that are enforceable as of the filing date are generally extended for a period of time.
Contract provisions for automatic or optional termination of a contract in the event of a bankruptcy filing are not generally enforceable.
The Bankruptcy Code also contains provisions which permit the Debtor to avoid certain pre-petition transfers or obligations made to creditors or related parties.
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Downsides To Chapter 11 Bankruptcy For Small Businesses
If you own a small business, you will want to seriously consider whether Chapter 11 is right for you.
Chapter 11 gives small businesses extra time to create a plan, file it, and renegotiate repayment terms with their creditors . But it also has its drawbacks.
It can cost tens of thousands of dollars in legal fees, which may be unsustainable for a struggling small business.
If the emergence from bankruptcy protection proves successful, these costs are offset by the ultimate reward of becoming profitable. In any case, it’s best to discuss your options with a seasoned business bankruptcy attorney before deciding.
Revocation Of The Confirmation Order
Revocation of the confirmation order is an undoing or cancellation of the confirmation of a plan. A request for revocation of confirmation, if made at all, must be made by a party in interest within 180 days of confirmation. The court, after notice and hearing, may revoke a confirmation order “if and only if the order was procured by fraud.” 11 U.S.C. § 1144.
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Chapter 11 Vs Chapter 7
With a Chapter 7 bankruptcy, there is no reorganization plan or restructuring of debt to continue operations. Its a straight liquidation of assets in which a trustee is appointed to sell a persons non-essential assets.
Houses and cars are usually put up for sale. Among the items that can be protected are pensions, reasonable necessary clothing, household goods and jewelry up to a certain value.
The proceeds go to creditors and the filer is legally cleared of debt. Legal fees are usually not an issue, though there is a $245 filing fee.
Thats the good news. The bad news is your is wrecked and you will have a near-impossible time getting a loan at a reasonable interest rate.
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What Is Chapter 11 Bankruptcy
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In a Nutshell
Chapter 11 bankruptcy cases are mostly utilized by businesses – think Skymall or General Motors – or folks with significant assets and debts. The typical consumer is not a Chapter 11 filer.
There are three chapters of bankruptcy that individuals can file. The most well known chapters are Chapter 7 and Chapter 13. Chapter 11 bankruptcy cases are mostly utilized by businesses – think Skymall or General Motors – or folks with significant assets and debts. The typical consumer is not a typical Chapter 11 filer, especially because both the filing fees and attorney fees are significantly higher. But, knowledge is power, so letâs take a closer look at Chapter 11 bankruptcy.
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Modern Law And Debt Restructuring
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.
For private households, some argue that it is insufficient to merely dismiss debts after a certain period. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation . In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor’s behavior. In the United States , discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system . The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law in 2003 which provides for debt settlement plans that can result in a reduction of the debt or an extension of the payment period of maximally five years , but it does not foresee debt discharge.
For Bankrupt Retailers Reorganization Is Increasingly Unlikely
The system that Squire described, one in which a company can restructure via Chapter 11 bankruptcy protection, isnt a realistic option for many retailers today. Thats in part due to the Bankruptcy Abuse Prevention and Consumer Protection Act , a 2005 amendment to the US Bankruptcy Code.
Previously, bankrupt retailers had 60 days to either reject or accept their store leases, but they could ask the court for repeated extensions of that deadline often for the full duration of a debtors bankruptcy case, according to the American Bankruptcy Institute. Under BAPCPA, retailers now get a maximum of 210 days to make that decision. No further extensions are granted without the landlords consent.
Retailers now have significantly less time to figure out which stores they ought to keep open and which they should close
This matters because it put a massive time crunch on retailers, which now have significantly less time to figure out which stores they ought to keep open and which they should close. It takes 120 days to organize and run a going-out-of-business sale, says Kibler, effectively giving the retailer a mere 90 days to figure out its store closure strategy. On the flip side, BAPCPA leveled the playing field for landlords: If a bankrupt retailer wants to get out of a store lease, it generally only has to pay between one and three years rent, even if it has another nine years left on its contract.
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Chapter 11 Effect Of Confirmation
If the plan is confirmed, its terms and conditions will be binding on all creditors, all security holders and all shareholders unless the plan or confirmation order provides to the contrary.
After confirmation, the debtor or other entity charged with performance of the obligations under the plan will proceed under the terms of the plan. Except for the obligation to carry out the plan and to comply with the courts confirmation order, the debtor or successor entity will be free of all Bankruptcy Code restrictions on operations and reporting requirements.
The Single Asset Real Estate Debtor
Single asset real estate debtors are subject to special provisions of the Bankruptcy Code. The term “single asset real estate” is defined as “a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 11 U.S.C. § 101. The Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay which are not available to creditors in ordinary bankruptcy cases. 11 U.S.C. § 362. On request of a creditor with a claim secured by the single asset real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor unless the debtor files a feasible plan of reorganization or begins making interest payments to the creditor within 90 days from the date of the filing of the case, or within 30 days of the court’s determination that the case is a single asset real estate case. The interest payments must be equal to the non-default contract interest rate on the value of the creditor’s interest in the real estate. 11 U.S.C. § 362.
Single asset real estate cases are ineligible for the small business or subchapter V election. 11 U.S.C. § 101, 1182.
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Why Are So Many Companies Filing For Bankruptcy Right Now
Many retailers particularly mall-based chains and department stores have been struggling for years. Then the pandemic brought business to a standstill, forcing them to close thousands of stores and leaving them with huge expenses, such as rent, and very little revenue.
There are two routes to a Chapter 11 filing: A company must either have more liabilities than assets or be unable to pay its debt as it comes due . Bankruptcy attorneys say both scenarios have become increasingly common in recent months as retailers and consumers weather the effects of the coronavirus outbreak.
For companies that were barely hanging on, the pandemic was the straw that broke the camels back, said Lawrence Katz, a bankruptcy attorney at Hirschler Law in Tysons, Va. Many had debt problems, they were struggling to find the right market and then all of a sudden the pandemic hits, stores close and they realize the only way out of this now is to file for Chapter 11.
How Does Chapter 11 Bankruptcy Work
Businesses turn to Chapter 11 bankruptcy when pinched financiallyoften due to a temporary downturn. It can help a viable business keep the doors open long enough to regroup and reimagine a future-forward strategy. It doesn’t matter whether the company is avoiding paying vendors, having a tough time meeting payroll or rent, or struggling with some other obligation that’s come due the debt relief afforded by Chapter 11 gets businesses back on track. Here’s how it works.
Chapter 11 Compared To Other Chapters
Businesses that know they need to and close up shop should consider a Chapter 7 business bankruptcy rather than continue to operate.
Another type of lesser-known bankruptcy case is Chapter 12. This is typically used by individuals who are family farmers or fishermen.
If you do not run a business, you might be looking for Chapter 7 bankruptcy and Chapter 13 bankruptcy. These are the most common types of bankruptcy filings for individuals and some companies in specific circumstances.
Cure Defaulted Or Accelerated Obligations
Debtors can use the chapter 11 process to cure defaults on obligations such as mortgages or leases. Often, when a borrower defaults on legal obligations, the lenders “accelerate” that obligation. This means that the lender asks that the entire amount of the debt be paid in one lump sum payment. Debtors in chapter 11 reorganization may be able to cancel the debt acceleration and return the obligation to pre-default status.
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How Does Chapter 11 Work
The case begins when a business owner files a petition with the bankruptcy court that serves the area where the business is domiciled or the business owner is living. In certain cases, the petition is involuntary and filed by creditors, rather than the business owner. The debtor is protected from litigation through an automatic stay, which stops most creditors from making collection attempts or filing or maintaining collections lawsuits. As with other types of bankruptcy, a creditor can file a motion with the court asking for the stay to be lifted with regard to a particular debt.
If a voluntary petition is filed, it will include the debtors name, residence, location of principal assets, plan or intention to file a plan, and a request for relief. It will also include financial information like schedules of assets and liabilities, contracts, leases, income, and expenses, and a statement of financial affairs. There may be additional requirements depending on whether the business is a sole proprietorship or organized in another form, such as a corporation or limited liability company.
A U.S. Trustee will monitor the debtor in possessions compliance. In some cases, however, a trustee is appointed for cause, and the trustee administers the debtors Chapter 11 case.
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Bankruptcy leaves the impression of utter failure, and when a company goes bankrupt, its easy to assume that its dead, may it rest in peace. According to this line of thinking, heres an alarming tidbit: If you regularly travel by plane, theres a decent chance youve flown with an airline that was bankrupt at the time. United filed for bankruptcy in 2002, followed by Delta in 2005 and American Airlines in 2011.
While bankruptcy can result in the liquidation or sale of a company, it also presents an opportunity for it to restructure while continuing to operate, suspend or reconfigure debt payment, and get back on its feet, so to speak. That was the case for United, Delta, and American, which all exited bankruptcy in less than four years. Since 2017, weve seen a wave of once-powerful retailers going the same route, like Sears, Mattress Firm, the clothing brand BCBG, and the accessories chain Claires.
The idea of corporate bankruptcy as a reset button is an American invention dating to the 19th century, says Fordham law professor Richard Squire. A boom in the railroad industry had led to over-building, and with too many railroads, some inevitably failed. But these businesses still had value, having invested heavily in laying down rails and building engines and cars. People realized that the cash generated by liquidating these assets selling them off piece by piece wouldnt be as great as the gains from letting the railroads continue to operate.
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Chapter 1: Business Reorganization
For a business, bankruptcy does not necessarily mean ruin. If it did, there would be three fewer major air carriers , two fewer car manufacturers , and no Marvel Universe.
Chapter 11 filings which surged during the coronavirus shutdown in 2020 allow troubled businesses to protect themselves from creditors while they reorganize their business operations, debts, and assets.
If all goes well, the business re-emerges a few years later oftentimes smaller, sleeker, more efficient, profitable and creditors have enjoyed a more satisfactory return than they would have if the business ended operations and was liquidated.
Sometimes, however, Chapter 11 buys only time. The reorganization plan fails, and liquidation results. The 2011 demise of Borders Books, once the nations No. 2 bookseller, is a prominent example.
What Are The Disadvantages Of Filing Chapter 11
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For a company that is struggling to the point where it is considering filing for bankruptcy, the legal costs alone might be a bit onerous. Plus, the reorganization plan has to be approved by the bankruptcy court and must be manageable enough to where they can reasonably pay off the debt over time. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
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How To Succeed In Chapter 11 Bankruptcy
A Chapter 11 bankruptcy can be likened to a very contentious election. Each class of creditors are entitled to vote to accept or reject your proposed treatment of them in your bankruptcy plan. After the initial hearings, the court will authorize you to start soliciting votes. Ideally, you get a vote of acceptance from every creditor and the judge approves the plan on this basis. You will likely have to negotiate various terms of treatment with the individual creditor to obtain acceptance so be prepared to compromise.
In the event you have a creditor who rejects the plan, the creditor’s non-acceptance may be a major impediment to court approval of your plan. If all negotiations fail, you will have to ask the judge to approve your case over the objection of the non-accepting creditor. This request is referred to as “cram down” because you are asking the judge to cram the terms of the plan down the non-accepting creditor’s throat.
As long as you successfully negotiate the treatment of each participating creditor in your bankruptcy, you should be able to restructure your individual or business debt in a way that allows you to emerge from bankruptcy lean and profitable.