When a Los Angeles business owes more than it can carry, the choices get hard: lay off employees, stop paying vendors, or default on the mortgage or the bank loan. Chapter 11 can help restructure that debt and keep the doors open. But simply hiring a lawyer isn’t enough - you need to know the fundamentals about the process. Otherwise, you won’t be in a position to recognize what an attorney or firm actually can do to help and what they’re just telling you. At Delancey Street we are a business debt settlement company, not a law firm, so read this as background rather than legal advice. The mission of this blog post is simple: to review the basics so your time with attorneys is far more valuable.
Stay in Charge
First, know what you are filing. Chapter 11 is a “reorganization.” It’s usually a business filing - corporation, partnership, sometimes an individual with debts above Chapter 13 limits. The goal is to let the business continue operating while it restructures its debt. It’s useful for catching up on past due mortgage payments, buying time to sell property that has equity, or handling delinquent taxes. It can help the owner keep the asset, stop a foreclosure sale and catch up over time, remove undersecured liens, reject bad leases or contracts, and eliminate tax penalties when the tax debt itself isn’t dischargeable.
Second, you stay in charge, but not entirely for yourself. In a Chapter 11, the debtor stays in control of its assets and operations and is usually its own trustee (the court can appoint a separate trustee). That’s a huge benefit, but it also comes with fiduciary duties: the court expects you to act in the best interest of creditors, even if that’s not what’s best for owners or officers. You can borrow new money during the case with court approval.
Plan of Reorganization
Third, everything turns on the plan. The entire purpose of the case is to come out of bankruptcy with a Plan of Reorganization approved (or “confirmed”) by the court. That plan is essentially a contract with the creditors on how they get paid and from what source. Creditors vote. If there aren’t enough votes, creditors can sometimes be forced to accept it if other requirements are met, but that might mean giving up assets. The key to success is negotiating with creditors. A good attorney looks at all options. So when you interview lawyers, one of the things you want to check for with an attorney is whether they can negotiate. If they can’t, that is a huge issue. It is the same work we do with funders and lenders outside of court.
Fourth, expect the paperwork to arrive early. There’s a significant amount of compliance and paperwork, a big chunk due in the first week to the U.S. Trustee’s Office, like proof of insurance, opening Chapter 11 bank accounts, tax returns, and financial statements. A status conference with the judge usually happens 60 to 90 days after filing. You’ll file a Disclosure Statement and Plan; once the disclosure statement is approved, the plan is mailed to creditors for a vote.
Fifth, the result is not fixed in advance. Depending on the value of your assets, your disposable income as a business, non-dischargeable debts you still have to pay, etc., you can erase anywhere from zero to a hundred percent of unsecured debt. Also important: the absolute priority rule. If you are an owner, you cannot keep your stock if a senior class of creditors is paid less than 100%, unless you contribute “new value” to the plan, and how much is enough is very case and judge specific.
Subchapter V
Sixth, ask whether you qualify for Subchapter V. This is a newer version of Chapter 11 meant to be simpler and more accessible for small businesses. It has tighter deadlines, a mandatory trustee with limited duties, no disclosure statement, and no absolute priority rule. But you must be running a business, meet certain debt limits, and have at least half your debts tied to your business. The trustee adds cost, though the extra fees are often not too high. And individual owners can modify the mortgage on their primary residence.
Seventh, weigh Chapter 11 against Chapter 13. Chapter 11 is more complicated, more costly, and requires more reporting and compliance - but it also offers flexibility, longer repayment windows, and fewer restrictions on who can file. Chapter 13 is open only to individuals with regular income, so a corporation or partnership can’t use it.
None of this means bankruptcy is the right answer for every owner under debt pressure, and it doesn’t mean it’s the wrong one. Delancey Street negotiates with merchant cash advance funders and lenders for less than the full balance owed. When a cheaper option exists or bankruptcy is the better path, we say so on the first call and refer owners to a vetted independent attorney, including Subchapter V counsel. The first call is confidential. It costs nothing to get answers to your questions.
