In some cases, a client's problems have become so dire that the only way to reorganize the client's financial situation is through a bankruptcy. For professionals and businesses, this typically means a Chapter 11 bankruptcy. There are many reasons why a client may need to file a Chapter 11 bankruptcy. Most often, this is because a client's creditors have become so aggressive that no negotiation will stop them from taking damaging collection action or the client has allowed the problem to develop to a point that drastic action is needed to prevent the loss of cash or property.
Chapter 11 is the chapter of the United States Bankruptcy Code that governs the process of reorganization under the bankruptcy laws of the United States. Alternatively, Chapter 7 governs the process of a liquidation bankruptcy. The purpose of a Chapter 11 bankruptcy case is generally to permit the rehabilitation and reorganization of the debtor's business. The Bankruptcy Code allows the debtor to accomplish this task by creating an "automatic stay" - a cash flow dam - that prevents creditors from taking collection action against the debtor, including filing lawsuits, obtaining judgments, collecting on levies and garnishments and other actions that could cause cash to flow out of the business without the debtor's consent.
The theory of Chapter 11 bankruptcy is that the value of a typical business as a reorganized going concern is substantially more than the value of its assets if sold individually. For that reason, Chapter 11 allows a troubled business to continue operating, cancels some of its debts, and transfers some or all of the newly reorganized company to the creditors whose debts were cancelled. If the company is reorganized, rather than liquidated, jobs may be saved, assets are retained, and the remaining creditors and equity participants may have smaller losses than if the company is dismantled.
One of the principal benefits of a Chapter 11 bankruptcy is that it allows a debtor to keep all or a portion of the its assets; it is unlike Chapter 7 which permits the retention of only a limited amount of the individual debtor's "exempt" property (businesses are not allowed to exempt property under the United States Bankruptcy Code). Rehabilitation of the debtor's business is accomplished through the creation of a Chapter 11 Plan that provides for the treatment of all claims against the debtor and the terms that will govern reorganization of the debtor's financial structure and operations. In most instances, the debtor's Chapter 11 Plan will be the result of a consensual arrangement between the debtor and its creditors and equity security holders. However, Chapter 11 does have certain provisions that allow the debtor to impose its Chapter 11 Plan on dissenting claimants in certain circumstances.
The court can grant complete or partial relief from most of the company's debts and its contracts so that the company can make a fresh start. In many cases involving large business enterprises or publicly held companies, the result of the Chapter 11 reorganization is the transfer of all or a substantial portion of the company's equity ownership from its prior owners (stockholders) to its bond holders and other creditors. In those cases, the company's creditors accept ownership of the company in lieu of payment on its claims in the hopes that it will eventually succeed financially and provide them with compensation for their losses. The debtor can also elect to terminate certain contracts and lease. Typical debts and contracts cancelled in a Chapter 11 bankruptcy include unsecured loans, union contracts (when cancellation would be financially favorable to the company), supply or operating contracts (involving both vendors and customers), and long-term real estate leases.
After filing a Chapter 11 and obtaining plan confirmation, the company may emerge from bankruptcy. Sometimes this takes only a few months, in other situations it may take several years. At times, the process can be long and complex, and at times, the reorganization fails and the company is liquidated, but the goal of Chapter 11 is to preserve the ongoing value of the business enterprise, preserve jobs and assets, and to result in a new reorganized, healthy business.
Contact our attorneys to request a consultation to discuss your situation and see how filing for Chapter 11 might impact your financial situation.
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