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Chapter 11 Bankruptcy for Businesses

Chapter 11 bankruptcy can be complex and time-consuming to complete. However, Chapter 11 stands as the only bankruptcy option for small business owners who wish to restructure and continue operating a limited liability company, corporation or partnership. In addition, Chapter 11 is the sole option for individual business owners who want to reorganize but who cannot meet the eligibility requirements for Chapter 13.

For some well-known corporations — including General Motors and United Airlines — filing Chapter 11 has come with significant media coverage. In most cases, though, Chapter 11 is filed by businesses without such high profiles.

How Does Chapter 11 Work?

Chapter 11 allows debtors to restructure finances with a court-approved reorganization plan. In many cases, businesses and individual business owners can continue operating — and even return to profitability — by modifying debt payment terms and decreasing financial obligations. Debtors also can sell assets if necessary to reduce the size of the business or to make payments toward debts.

Many business owners choose Chapter 11 because they expect revenues over time to be higher than the current value of liquidating assets. Creditors typically favor Chapter 11, since it raises the odds of receiving a higher amount of debt repayment. A business owner in Chapter 11 becomes a “debtor in possession” who maintains ownership and control of assets and continues regular business operations.

Small Business Bankruptcy Options

In addition to Chapter 11, other primary bankruptcy options exist for small businesses.

Chapter 7 is an option for debtors who are unable to restructure their financial obligations and continue operating their businesses. In a Chapter 7, the bankruptcy court appoints a trustee, sells any assets and pays creditors as far as the funds go. Business structures eligible for Chapter 7 include LLCs, corporations and partnerships. In some cases, sole proprietors also are allowed to file for Chapter 7.

Chapter 13 provides the opportunity to restructure for sole proprietorships. Only individuals are eligible to file, and Chapter 13 is not available to corporations, LLCs and partnerships.

In general, the requirements are the same in Chapter 11 for small businesses as for corporate bankruptcy involving larger companies. However, certain special provisions apply to small business debtors to allow them to get through the Chapter 11 process — and reduce its associated restructuring expenses — as quickly as possible.

Chapter 11 Requirements

Businesses that file for Chapter 11 bankruptcy are required to list all the debts from which they’re seeking protection, and they must disclose all their assets. In bankruptcy cases involving significant amounts of money, this step alone can prove to be complex and time-consuming.

If the bankruptcy court determines that the debtor has engaged in any mismanagement or fraud, it can appoint a trustee to take control of business operations as the bankruptcy case proceeds. The business operates as usual, but the owner no longer is in control.

As a Chapter 11 case moves forward, the business can engage only in sales and purchases that play a role in typical business operations. It cannot merge with another company, sell major equipment or take other significant actions without the bankruptcy court’s approval.

In addition, a creditors’ committee represents unsecured creditors in negotiating the most favorable payment options possible, and stockholders can form a committee as well.

After the business submits a plan for reorganization, the company stockholders and creditors take a vote. Even if stockholders reject a plan, it typically can move forward if the creditors approve it. Once the bankruptcy court approves the reorganization plan, the Chapter 11 is considered confirmed and certified. The debtor is required to remain in compliance with the plan and make the agreed payments to creditors.

Costs Associated with Filing

Chapter 11 bankruptcy typically works best for business owners who want to reorganize and continue operating their companies. Staying in business can come with significant costs, however, including being under the watchful eye of a trustee appointed by the court.

The financial costs of Chapter 11 bankruptcy vary but often reach $10,000 to $25,000; for larger companies, costs can be $50,000 or more. The fee for filing the Chapter 11 petition with the bankruptcy court is $550.

Get Professional Legal Help with Chapter 11

If you’re having trouble meeting your debt obligations and wish to continue operating your business, a Chapter 11 bankruptcy may be the right choice to return your company to profitability. To learn more about your options, speak with an experienced business attorney at Gertler Law Group, LLC.