Is Chapter 11 Bankruptcy the Right Choice for Your Small Business?

Small businesses can hit a rough patch in any economy. Because of their size, small businesses are vulnerable in the way a larger one might not be. If a vendor disappears or a major client chooses to do business elsewhere, then your company might face an immediate cash crunch.

Many small business owners resist filing for bankruptcy, possibly because they don’t know how it can help their business.Chapter 11 is a popular bankruptcy option. Unlike Chapter 7, a business does not need to liquidate, which means you can continue to keep the lights on and do business as you restructure your debt. Chapter 11 is not reserved for big companies listed on the Dow Jones—even small businesses can benefit from filing. CallResolve Law Firm to talk about your small business with a San Diego bankruptcy lawyer.

How a Chapter 11 Bankruptcy Works

This is popularly called a “reorganization bankruptcy.” Essentially, a debtor can reorganize their debts so that they are manageable without liquidating their assets. A Chapter 11 allows a business to continue to operate while it restructures its debt pile.

Chapter 11 is popular with business owners who don’t want to shut down. A business owner can use a Chapter 11 for:

1. Debt restructuring. You get to renegotiate with creditors. You can reduce the amount owed or reorganize the debt so you have longer to pay it off, for example.
2. Legal protections from creditors. When you file for Chapter 11 protection, you gain the benefit of the automatic stay which prevents creditors from taking any collection activity, like suing you for an unpaid debt or trying to foreclose on collateral. All current collection activity should be paused, also.

At the same time, you can continue to keep your lights on and do business as you work out debt restructuring. Some businesses even take on new debt.

Is Chapter 11 Right for You?

This bankruptcy is more complicated than if you were simply liquidating your assets and shutting down. There are more meetings and paperwork. Helpfully, Congress has simplified Chapter 11 for many small businesses, so it is a more attractive option. Smaller businesses can avoid cumbersome Creditor Committees and will need to file less documentation.

Ask yourself the following questions:

1. Do you intend to keep your business going? If not, then you might choose to liquidate, since that is often an easier option for those who are shutting down permanently.
2. Do you face a temporary speed bump or brief economic headwinds? Do you anticipate your industry to improve over the coming 12 months? If not, then Chapter 11 might not be right for you. You could find yourself back in insolvency if your business has little chance of flourishing.
3. Could you negotiate with creditors outside of bankruptcy? They might be open to restructuring debt voluntarily, in which case you might not need to file any bankruptcy.

We recommend calling Resolve Law Firm. Our San Diego bankruptcy lawyer can do a deeper dive into what’s happening financially at your company. We can also talk through your goals as a business owner.

Steps in a Chapter 11 Bankruptcy

Here is an overview of the process:

1. File for Chapter 11 protection.Your bankruptcy lawyer can fill out the forms and supporting schedules which spell out your company’s assets and debts.You also need to include abusiness plan showing how you intend to return to profitability.
2. Halt collection activity. The automatic stay will immediately spring into effect, but you might need to notify a court where collection activity is ongoing.
3. Create a reorganization plan. Working with your creditors, you create a plan that identifies how you intend to restructure or adjust debt payments. You might change the terms or, in some cases, reduce the amount you owe to creditors.
4. Approval of reorganization plan. A judge will need to approve the reorganization plan.

Call Resolve Law Firm if you have questions about any part of the process. Many people are considering Chapter 7 liquidation and aren’t entirely sure if Chapter 11 is worth their time. But there’s no reason to immediately liquidate your company if that’s not what you want.

The Role of the Trustee

The trustee is central to your Chapter 11 bankruptcy. This person will review all the filings and has a role in trying to maintain communication between the debtor and their creditors. The trustee is also tasked with investigating certain issues as identified by the court, such as whether the debtor has committed fraud or whether the debtor’s proposed reorganization plan will work.

The debtor is responsible for paying the trustee. However, this does not mean the trustee works for you. Instead, the bankruptcy trustee has duties to the court and the bankruptcy estate.

How Resolve Law Firm Can Help

Running a small business is stressful even in a perfect economic climate. But add financial stress on top, and many people are drowning. Helpfully, you can get assistance from an experienced bankruptcy attorney.

Our firm can:

• Evaluate your company’s finances, including cash flow;
• Discuss whether you want to continue to run the business;
• Review all your company’s debts and contracts;
• Help create an acceptable business plan to submit with your Chapter 11 filing;
• Develop a reorganization plan that works for your company;
• Complete all forms and file them with the court;
• Attend court hearings with you and help answer any questions that arise;
• Take any other steps to protect your company, such as bringing litigation if a creditor ignores the automatic stay.

Chapter 11 provides a unique opportunity for business owners to finally get some breathing room from their business debts while, at the same time, continuing to maintain customer relationships.Many businesses have successfully reorganized and are embracing the future with confidence.

Schedule a Consultation Today

Resolve Law Firm brings the same dedication to each business client that it does for individuals who are considering bankruptcy. Each case is unique, and you deserve advice which is tailored to your specific situation. Call us to schedule a consultation with a San Diego bankruptcy attorney in a private consultation.