When Can a Small Business File Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a resource tool for businesses, allowing them to restructure their finances by shedding their liabilities. By filing for bankruptcy, small business owners get room to reorganize themselves financially. Companies can also quickly sell all or part of their assets without the liability of claims, liens, and interests.
Filing for bankruptcy is a challenging decision at a personal or corporate level, but it could be the one thing that gives you a second chance. If your business is facing high amounts of debt and you believe you can survive it, Chapter 11 bankruptcy could be a viable option. Consult chapter 11 business reorganization lawyers in California to guide you.
Can a Small Business Survive Chapter 11 Bankruptcy?
Many small businesses file for Chapter 11 bankruptcy than big corporations. The solution is available to firms that intend to continue operating and restructure their businesses. Sole proprietors who owe too much debt to meet the requirements of Chapter 13 bankruptcy may instead use Chapter 11 to restructure and reorganize their businesses.
Deciding to file for bankruptcy can be tricky, especially because you need to consider the impact of that decision on your business. The process involves significant financial risks and costs and is lengthy and complex. So, it’s advisable to seek the legal counsel of experienced Chapter 11 attorneys to help you weigh your options for an informed decision.
How Does Chapter 11 Bankruptcy Work for Small Businesses?
A small business that seeks to file Chapter 11 bankruptcy does so in the bankruptcy court that serves the company’s principal business location. The court requires a business to provide detailed information about all its assets, current income, liabilities, contracts, expenditures, and general financial affairs.
Sole proprietors must provide additional information, such as copies of debt repayment plans and proof of credit counseling. Ensuring you provide all the necessary paperwork can be overwhelming, but experienced Chapter 11 lawyers can oversee the process to ensure you do everything right.
A Small Business Retains Control
At this stage of filing for bankruptcy, you become a debtor in possession, meaning the business assets remain within your control. However, the status comes with responsibilities such as:
- Accounting for all property
- Filing additional reports as the court requires
- Responding to claims
- Creating a proposed repayment plan that would be acceptable to creditors
- Developing and submitting a reorganization plan
The reorganization plan helps your business renegotiate repayment terms, balance out income and expenses, reduce obligations, and sell off assets if necessary. As all these events happen, your business can continue its operations. The entire setup can be complicated, which drives you back to the importance of working with experienced bankruptcy lawyers in California.
What Are Chapter 11 Requirements?
For the court to approve a business reorganization plan, it may require the creditor’s committee to represent the interests of the creditors owed. The committee consults with the debtor to investigate the outstanding debts during the case period.
The court also requires that the reorganization plan provide the following figures:
- All of your business’ projected disposable income is to be received within a 3-5-year period, starting on the date the first payment is due under the plan. The figures form the basis of the repayments to be made under the plan.
- The value of the property to be distributed in the 3-5-year plan, starting from the date when the first distribution is due. It should not be less than the business’ projected disposable income.
Are There Advantages to Chapter 11 Bankruptcy?
An outstanding advantage of filing for Chapter 11 bankruptcy is that a business can continue its operations while reorganizing. That way, it can create cash flow that aids in repayment. You will have peace of mind as you restructure the business since the court issues an order to keep creditors at bay.
Most creditors hold Chapter 11 bankruptcy in high regard because it allows them to recover their money over the repayment plan. The situation is better than if the business that owes them closed down.
Are There Drawbacks to Filing Chapter 11 Bankruptcy?
Despite the relief Chapter 11 bankruptcy provides, it is one of the most complex bankruptcy types to file. The costs involved are also quite high for a struggling business. Other adverse implications of the code are:
- Loss of privacy: Debtors must provide substantial financial information to the court to file Chapter 11 bankruptcy. The information is public record.
- Reporting and financial record-keeping requirements: Debtors must maintain detailed financial records and reports, which can be hectic
- Debtors must show a profitable operation: Filing for Chapter 11 demands a high level of confidence that the business will make enough profits to cover the debts.
- Possible loss of shareholder control: Under some circumstances, filing for bankruptcy puts the original shareholders at risk of losing their positions completely
- Possible loss of some control over business operations: You can generally continue business operations by performing only those activities that are ordinary course of business. Those other activities require court approval, including purchasing, refinancing, selling, or leasing significant capital assets.
A Skilled Bankruptcy Lawyer Providing Legal Guidance to Protect Your Business
Reorganizing your business under Chapter 11 can be beneficial but has some implications. Before filing for Chapter 11, consult skilled California Chapter 11 attorneys to help you weigh your options. Once you determine it is the right thing to do, your lawyers can help you with the filing process and walk with you throughout the case period.
Resolve Law Firm hosts skilled bankruptcy lawyers dedicated to giving people and businesses a second chance. We know how daunting it can be to face a difficult time in business ownership and want to help you forge ahead toward a bright future. Call us at 213-583-5547 and let us explore your options.