If you’re a business owner struggling to stay afloat, you’re in good company. Over the years, even huge corporations such as the Texas Rangers, Marvel, and the Chicago Cubs have had to file for bankruptcy. In fact, nearly 25,000 American companies declare bankruptcy every year. “Many small business owners can’t afford to stay open, and it’s very hard,” says Cathy Moran, a bankruptcy attorney in Mountain View, Calif.
But with a solid reorganization plan approved by your creditors, Chapter 11 may be the light at the end of the tunnel. Moran says fear, stubbornness and pride commonly interfere with a decision to file for bankruptcy. “Staying in debt means living with stress or dying of stress,” she says. “Bankruptcy is not a moral failing; it’s a legal solution to an economic problem.”
A Chapter 11 bankruptcy doesn’t mean your business is closing its doors. Instead, a Chapter 11 lets you restructure your finances so that creditors and owners can get the maximum returns. In other words, you stay in control of your assets, work with the courts to come up with a plan to repay your debts and (if all goes well) make a strong comeback. In order to be granted a Chapter 11 bankruptcy, you’ll have to make the case that your business will be profitable after you restructure your debt.
The main advantage of a chapter 11 bankruptcy is that it allows your business to continue while you restructure your debts. Importantly, it provides an “automatic stay” that prevents foreclosure and debt collection. It also prevents creditors from contacting you at your home or business.
Of course, bankruptcy has a downside. For starters, it carries a stigma, and many business owners are reluctant to use it out of fear that it will damage their reputation. Debtors trying to reorganize under Chapter 11 must file detailed financial information with the bankruptcy court, which means they lose a little privacy along with their pride. These documents become public record with a court filing and are available to anyone.
You’ll retain control over most operations known as “the ordinary course of business.” But you’ll need court approval to do other things like refinancing, selling or buying business property, leasing or breaking a lease, expanding operations, or signing and changing vendor agreements, licensing contracts and union contracts.
In addition, the hard news is that in most cases, a Chapter 11 bankruptcy is dismissed or converted to a Chapter 7 bankruptcy, which forces the debtor to sell off assets to pay creditors. Moran says conversion to Chapter 7 can occur for a number of reasons, though typically it’s because the owner is unwilling or simply unable to follow through on the confirmed reorganization plan.
But a Chapter 11 may also help you save your business, although it’s considered too complicated to attempt without professional help. “For legal advice specific to your situation, see a bankruptcy lawyer,” Moran says. “I wouldn’t try to go it alone.”
The process also won’t be cheap. Even the simplest Chapter 11 reorganization, Moran says, is roughly 10 times the cost of a Chapter 7 personal bankruptcy. For starters, be ready to pay a $1,1167 case filing fee for a Chapter 11 petition, as well as a $550 miscellaneous administrative fee, which the court may agree can be paid in installments.
How a Chapter 11 works
In order to make your case, you’ll likely have to file a list of assets and liabilities, an accounting of your income and expenditure and any ongoing business contracts. If the court believes you can make your restructuring plan work, it’s up to your creditors to vote on the plan.
If your chapter 11 is approved, you can continue to operate your business to the best of your ability. In most cases, your business continues to operate with you at the helm as debtor (officially, “debtor in possession,” or DIP). As Moran explains, “This means you keep your possessions and continue to control business assets while undergoing a Chapter 11 reorganization.”
An attorney can advise you if you need to go into credit counseling. If you’re filing as an individual (or husband and wife business partnership), counseling may be required. A credit counselor will help you to put together a plan to repay your creditors and keep your business afloat. Your credit counselor will also file a certificate of credit counseling and a copy of the debt repayment plan you developed together.
An attorney can also advise you how to run your business without getting into further debt. “Chapter 11 is often a knee-jerk reaction when things fall apart,” Moran says. “The usual problem is there is no real plan, as in, what would you differently than you did before if you could reorganize?”
Despite the odds, some business owners who file for Chapter 11 do manage to recover with their business intact. With careful planning and help from your attorney, Chapter 11 may work for you.
Chapter 11 Bankruptcy: An Overview. NOLO. http://www.nolo.com/legal-encyclopedia/chapter-11-bankruptcy-overview.html
Chapter 11 Bankruptcy Basics. United States Courts. http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics
Bankruptcy Court Miscellaneous Fee Schedule. United States Courts. http://www.uscourts.gov/services-forms/fees/bankruptcy-court-miscellaneous-fee-schedule