Chapter 11 Bankruptcy Gives Companies Breathing Room

Posted on Monday, July 09, 2018

In an uncertain economy, many companies seek a fresh start under Chapter 11 bankruptcy proceedings if they think they could be profitable by getting relief from their debts.

Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It's different from Chapter 7, which involves liquidating or selling off the assets of a company closing its doors. Chapter 11 allows a business to continue day-to-day operations.

Types of Bankruptcy and Characteristics

Chapter 7

Corporation goes out of business and a trustee is appointed to sell its assets. Proceeds are distributed to creditors and most remaining debts are wiped out. Also available to partnerships and individuals.

Chapter 11

Company continues operating and negotiates a court-approved repayment plan with creditors. Typically used by businesses but is available to individuals.

Chapter 12

Available only to family-owned farms and family fishing businesses.

Chapter 13

Individuals with regular income keep certain assets and pay debts under a court-approved plan. Typically takes 3 to 5 years. Not available to corporations but may be used by some businesses that are operated in sole proprietorship.

Here are some of the major steps involved in the Chapter 11 process, which can take many months or longer to complete.

Step 1. The appropriate forms are filed in court and the company is provided immediate relief — called an "automatic stay" — from creditors. A bankruptcy filing may not affect business operations but will likely affect the stock price and borrowing costs. A company continues to pay employees and provide benefits. It is also able to keep dealing with suppliers and customers so that it can continue earning money.

Step 2. After filing, the bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they are owed money by the company.

Step 3. The company proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the company is proceeding in good faith, the exclusive period may be extended.

Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any claims that are disputed. Once the total value is determined, the company can see if its financial reorganization plan is economically viable. Sometimes, litigation over the priority or handling of creditors arises.

Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a financial reorganization plan and the company distributes payments according to the plan.

Unlike Chapter 7 bankruptcy, debts are not simply absolved by filing Chapter 11, although debts are likely to be reduced or paid off over a period of years. And although you can keep operating, your reputation may be hurt with customers, suppliers and employees.

If your company is thinking about filing Chapter 11, you need a clear understanding of what's involved because this is a complex proceeding. Consult with your attorney and tax advisor to plan the most beneficial bankruptcy option.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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