Reasons To File Chapter 11 Bankruptcy

Reasons To File Chapter 11 Bankruptcy

The reasons for filing a Chapter 11 are as numerous and myriad as the scope and range of business in this country, and if done properly and timely, can be one of the most beneficial, and sometimes, the only way to save an otherwise doomed business.

Some Chapter 11 cases are filed to prevent foreclosure of valuable real estate property long enough to either sell or develop the property.

Others simply need time and protection from their creditors to trim expenses and improve profitability, or simply need to reduce the monthly operating expenses to an amount they can realistically pay.

Chapter 11's are commonly used to obtain an expanded time period within which to pay back all or part of the outstanding obligations, including the ability to stretch tax repayments to the IRS, EDD, etc up to six years. Tax creditors generally do not get to vote, and are stuck with the plan provided they are to be repaid within 6 years, and if they consent, the period can be stretched even longer. Generally speaking, a Chapter 11 is a reorganization of your financial affairs, as to monthly payments, and many times, as to the principal balance of your debts, without borrowing any money. It allows you to stop foreclosures, repossessions, tax levies, IRS seizures, and other creditor actions, by allowing you to set up a court enforced repayment plan. Immediately upon filing, the court will order an automatic stay against your creditors, to allow you some breathing time to concentrate on operating your business, and restoring its profitability and cash flow.

What Happens When You File Chapter 11 Bankruptcy

Essentially what happens upon filing the petition is that you immediately stop paying all unsecured debt, including taxes. You will, or may continue paying secured obligations, depending on what your situation and ultimate plan is. You may pick and choose which secured creditors to pay, and you can surrender unprofitable secured property and/or leases.

Many multi location debtors utilize Chapter 11 to close unprofitable locations, without being stuck for the full measure of breach of lease damages allowed under state law. The damages allowed for breach of leases are limited in a Chapter 11 proceeding.

This moratorium on paying unsecured debt continues until after you have a plan voted on by creditors, and confirmed by the court. This almost always takes at least 6 months or more, and commonly takes a year or more before you commence making payments pursuant to your plan. In some cases, it can take even longer. During this time, you operate your business with minimal restrictions imposed by the court. Generally you can continue to do whatever you normally would do in your business, without obtaining court approval. If you intend on taking some action outside the normal scope of your business, advance court approval is necessary.

To prevent professional persons (and insiders) from taking advantage, advance court approval is necessary to hire attorneys, CPA's, and other professional persons. The process is generally a routine rubber stamp administrative process, provided there are no conflict of interest problems. There are some judges who take the duty of approving the chapter 11 debtor’s general counsel seriously, and will not approve someone who has not demonstrated the requisite experience in Chapter 11 cases. Some judges will approve anyone, as long as there are no apparent conflicts, on the theory that who you choose as your attorney is your problem.

There are relatively minor financial reporting requirements, which require the filing of monthly reports with the U S Trustees Office. Additionally, the U S Trustees Office has 7 day initial filing requirements to provide certain required documentation. The initial requirements are a little inconvenient, but not burdensome if set up correctly. However, the penalty for failing to comply can result in the case being dismissed, or converted to a Chapter 7 case. This is another simple example of why you need a Chapter 11 Bankruptcy attorney who is experienced in the courts that will hear your case.

Some debtors file Chapter 11 to get out from underneath Union Contracts, which are crippling their ability to operate profitably under current business conditions. There are specific guidelines on when a company is allowed to terminate union contracts, but if your business is being crippled by them, it is possible to terminate the union contracts.

Chapter 11 Complexities

The procedures are complex, and full of booby traps for the unwary. Choose a lawyer without substantial experience in Chapter 11 cases, and you will soon learn very painfully and unmercifully why which lawyer you choose is so extremely important in Chapter 11 cases. And why so many Chapter 11 cases fail.

Want an example? Imagine you operate a regional airline with a long-term lease with several long-term extension options, and that you obtained the lease before anyone anticipated the major expansion of the airport. In other words, that lease is a multi million dollar asset. But your controller was embezzling money, not paying payroll taxes, or some of your management was just sloppy, inattentive or incompetent, or there was an unanticipated problem which created a severe temporary cash flow problem, or your assets were seized by the IRS. Whatever the scenario, you file a Chapter 11 to keep the IRS or creditors off your back so you can concentrate on operating your business efficiently, and restore its cash flow and financial health. In a Chapter 11, you can keep the very valuable lease provided you comply with the Chapter 11 procedural requirements. However, you have chosen to utilize the law firm you have used in the past for general business services. Because they do not specialize in Chapter 11 cases, they call your lessor and assure the lessor that there will be no disruption in the payment of lease payments, and that the bankruptcy was filed to deal with other creditors, and not the lease. They report back that your lessor was friendly and seemed very cooperative. 61 days after you filed the petition, the lessors lawyer (who is a Chapter 11 lawyer) calls and informs you that you are to immediately surrender the premises, and that all rights you had in the lease are forfeited. And by the way, his client has leased your leasehold property for twice the sum you were paying. Your case is over, and you are out of business.

By operation of law, and without any notice, pursuant to the Bankruptcy Code, non residential leases on real property are irrevocably deemed rejected on the 61st day after filing, unless they have been formally assumed by the debtor, or a motion to extend the time to assume has been filed before the 60 days is up. There are no appeals, and no reconsiderations, and no matter how much the judge may want to help, he is powerless to do so, no matter how devastating the result. This area of the law is a minefield for the inexperienced, so choose counsel very carefully.

In general, Chapter 11's involve the selling of a plan to creditors who ultimately will vote on whether to accept the plan. Generally, if more than half the creditors in numbers, and two thirds in dollar amounts vote for the plan, the remaining creditors in that class are bound whether they like it or not. Composition plans, where less than the full amount is paid back, are common in Chapter 11 cases.

Chapter 11 Mistakes

The biggest mistake most debtors make, and one of the biggest reasons for the failure of so many Chapter 11 cases is, THEY WAIT TOO LONG TO GET COMPETENT ADVICE. They spend their cash flow trying to catch up and satisfy creditors in hopes of avoiding filing bankruptcy, and when they are finally forced to confront filing, their cash position and/or cash flow is so deteriorated, that they don't have sufficient cash to operate their business, even with the debt payment moratorium, and the courts protection from creditors collection efforts.

Hi I’m Marc Tow; I have been a Real Estate and Bankruptcy attorney for 30 years. I have also been a Mortgage Broker for 20 years. I have been in business this long because I actually care about my clients.  Feel free to contact me at marctowmarketingteam@yahoo.com or visit my website at http://towlawbankruptcy.com or call toll free at (888)445-4140.  All consultations are free, thank you.