In 2020 Texas had the highest rate of Chapter 11 filings in the country. Neiman Marcus and JCPenney, both massive retailers, were among the filings and both were able to take advantage of Chapter 11 reorganization to come out on the other side. Filing for bankruptcy is never a fun thing to do, but it can keep a company open while it restructures in a way that lets them pay creditors and build a better future. Many business owners come to the bankruptcy lawyer because they have bills that they just can’t pay. We’re Delancey Street, and we negotiate with MCAs and lenders for business owners, for less than the whole balance due. We’re not a law firm, and when bankruptcy is the right call we tell our clients so on the first call, and refer them to an independent attorney. Here’s what business owners need to know before hiring a Chapter 11 attorney.
Reorganization Bankruptcy
The first is what Chapter 11 actually is. People often use the term ”reorganization bankruptcy” to describe Chapter 11. That means it’s for individuals or businesses that need to declare bankruptcy but will be in a better position to pay their creditors by keeping their doors open than by liquidating assets. Chapter 7 might involve the sale of assets that are not exempt. A Chapter 11 filing is usually for a business. Individuals, by contrast, generally (though not always) file for either Chapter 7 or 13 bankruptcy.
Second, Chapter 11 is, on paper, the most expensive and complex bankruptcy available. It is also generally used by businesses that have the resources to pay for it. Big companies have the capital and time to hire lawyers to sit around a conference table and argue over every little thing, but that approach is out of reach for small companies. The Small Business Reorganization Act of 2019 created Subchapter V, a cheaper, more streamlined Chapter 11 case for small businesses and individuals. Be sure to ask any attorney you interview if Subchapter V makes sense for your business.
Third, not every business qualifies. In order to qualify for Chapter 11, you’ve got to show that your creditors are going to get a better deal if the business survives than they would in a straight liquidation case under Chapter 7. If you can’t show the case is feasible, they can dismiss it or convert it to Chapter 7. What’s more, your creditors play an active role in approving your reorganization plan. Whatever the proposal you come up with, it will have to be presented to your creditors.
Know the Timeline
Fourth, know the timeline. Chapter 11 bankruptcy generally can range from a few months to a few years, depending on the size of the business and the debt involved. But the process tends to follow the same general pattern, no matter how long it goes on. First, you file a petition with the bankruptcy court and get it approved. Once that happens, the court issues an automatic stay that stops all of your creditors from collecting from you. If you are getting hounded by funders, that’s important. It can feel like a welcome change. However, there is more to Chapter 11 than just no more phone calls.
Fifth, you will probably keep running the business. In most bankruptcy cases the business owner is given the role of debtor in possession, meaning they continue to control the business and its assets as normal. In some cases the court may appoint a trustee to perform that role instead. The court may also appoint a committee of the largest creditors that has the authority to make decisions on behalf of all creditors in the case, though in many Chapter 11 cases no committee is appointed. Trustee or no trustee, Chapter 11 is one of the things in our legal system you simply can’t do alone.
Sixth, expect paperwork and a hearing. The debtor must file a disclosure statement, which is basically a big list of all the assets and liabilities of the business and its creditors and a general overview of its financial situation. This has to be approved by the court before the reorganization plan can be accepted, but you don’t have to file a disclosure statement in a Subchapter V case. Then the court holds a confirmation hearing to make sure there aren’t any objections to the plan and that it was prepared in good faith. After that, the debtor in possession may do periodic evaluations to make sure the plan is carried out and creditors get paid.
Chapter 11 Lawyers
Seventh, and maybe most important: the thing that really drags out Chapter 11 cases is when the debtor and the creditors squabble back and forth, and those squabbles can result in major legal expenses. Having an attorney who is experienced in the bankruptcy area can be invaluable to ensure that the case gets moved forward as efficiently as possible — not only does that save time but it saves money. So when you interview Chapter 11 lawyers, be sure to ask about their experience in this area and how they deal with disputes with creditors.
Chapter 11 isn’t the only option. You can negotiate with funders and lenders outside of bankruptcy, too. If bankruptcy is the better option — Subchapter V, for example — then an honest adviser will tell you that, too. A first consultation with us is free and confidential. Either way, get familiar with the process before you start hiring people to fix it for you.
