Deciding on bankruptcy is not an easy step, but bankruptcy in a business is also far more common than most people might expect. When a business files Chapter 11 bankruptcy, it means they’re financially overwhelmed and can’t pay their creditors. It is mostly used by companies.
The Chapter 11 bankruptcy process is familiar to owners of struggling small businesses, who can use it to sell assets or restructure debts. But Chapter 11 is also an option for individuals with strong income prospects, even if they also face heavy debt.
Filing Chapter 11 bankruptcy gives you time to catch your breath and get the business in order. It stops collection actions while you develop a plan for how to reorganize your financial affairs, but it is complicated and can be drawn-out and expensive.
A person who files Chapter 11 can reorganize all their debts in their own name.
The goal of Chapter 11 bankruptcy is to reorganize the business while protecting existing assets. A business that goes through the Chapter 11 process can only restructure its own debts.
Chapter 11 bankruptcy is used far less often by individuals than by businesses, but for those who do, the goal is usually to restructure real estate investments or unsecured debts that are too large to resolve in Chapter 13.
A common example is a very high-net-worth individual who ended up with unusually high expenses, or with bad investments. Their earnings and potential for future earnings are what makes Chapter 11 worthwhile for them.
Mortgages and other real estate loans can be restructured through the Chapter 11 process. Principal on the mortgage is often reduced to reflect the current fair market value of the property.
Say you owe $150,000 on a business property that is currently worth $100,000. Chapter 11 can allow you to reduce the principal you owe on the property to $100,000.
Loan repayment plans can be extended to as long as 30 years, at lower interest rates than the original terms of the loan.
The majority of people who file bankruptcy with the intent to reorganize their debts use Chapter 13, but Congress has created a debt limit for Chapter 13 filers.
People who go over the limit need to file Chapter 11 instead.
Under Chapter 11, a bankruptcy court approves a plan that sets a payment you can afford. Once you pay the plan in full, you owe nothing more on the debts included in the repayment plan.
Small Businesses
Filing Chapter 11 bankruptcy doesn’t require being a big business. A small business is defined as having less than 500 employees.
Chapter 11 has a reputation as a way for big businesses to escape financial trouble, but the majority of Chapter 11 cases get filed by small businesses. Bankruptcy courts have a simple test: Does the bankruptcy judge see a reasonable likelihood that the business can be profitable if it is reorganized? Many small businesses that attempt Chapter 11 reorganization get dismissed and converted to Chapter 7.
Partnerships are a common business structure, but their options in bankruptcy are limited. Chapter 11 is an option for partnerships that show promise of profitability in the future.
Bankruptcy court gives a business 180 days to negotiate with creditors. This stands in contrast to Chapter 7, where that same process lasts just 15 days. But the upside comes at a cost.
Cases that drag on for months or years can incur more in legal fees than the company can pay. But a reorganized company emerges from Chapter 11 with the potential to be profitable again.
Restructure Its Debts and Pay the Overdue Taxes
Chapter 11 is a way for a business that has a payroll tax problem, or any other problem with taxes, to get the problem under control and continue operating.
In many cases, the business can restructure its debts and pay the overdue taxes over a period of up to five years. A Chapter 11 filing gives you and your attorneys the ability to negotiate to structure the tax debt in a way that works for everyone.
Secured debt can also be restructured. When debt is secured by collateral that will be used to make money in the business, Chapter 11 can make the debts more manageable.
The bankruptcy code allows you to pay what the property is worth, regardless of the loan balance on it. This property might be a work vehicle or other piece of equipment. It could be real estate or a business building.
You might want to stay in business while cutting debts to more manageable levels, so your business can become more profitable and grow.
In startup mode, a business often uses credit to cover operating expenses. But over time, this can add up to high levels of debt that require attention.
Payment on these debts can be a lump sum that is smaller than the original debt balance. It can also be monthly payments that are stretched out over a period of several years.
If you don’t make a deal with creditors, the bankruptcy court will impose a plan on you and require you to make payments that the court thinks fit.
Contracts
Chapter 11 allows a company to choose which contracts it wants to stick with and which it is prepared to walk away from. You can reject a long-term agreement you can’t afford and negotiate with suppliers to find better terms.
As long as it is clear to the court that your reasoning on a contract is sound and based on the company’s need to return to profitability, the court will likely agree with your plan.
In Chapter 11, a lease whose terms are so costly the business can’t afford to continue with it can get rejected. By law, you are required to tell the court within a fixed period of time if you want to get out of the lease, or you lose your right to cancel it.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
