Is Chapter 11 Right For My Small Business?
A Chapter 11 Bankruptcy May Be Your Best Option.
Bankruptcy is a tool used by individuals and businesses to eliminate debt and start fresh. However, personal bankruptcy and business bankruptcy are different things with different rules.
If your small business is drowning in debt, you can file for Chapter 7, 13, or 11 to get out from underwater and start fresh. To decide what chapter to use, you must determine whether a personal bankruptcy or business bankruptcy is right for you.
The Personal or Business Bankruptcy Options
If you are personally responsible for your business debts, a personal bankruptcy under Chapter 7 or 13 is probably the best option. You are personally liable if your business is a sole proprietorship or a general partnership. Also, you are responsible if you gave a personal guarantee to secure the financial obligations of your business.
If your business is a corporation, LLC, or joint venture, the company is responsible for its debts – not you. (However, there are exceptions; read our “Answers” page for more information).
If you file a business bankruptcy, you’ll do it on behalf of the business, and you’ll use Chapter 7 or Chapter 11. Business entities are not eligible to file under Chapter 13.
You may have to close your business if you file a Chapter 7 bankruptcy. Chapter 7 is a “liquidation” bankruptcy. In a liquidation proceeding, the trustee sells the assets of the company to pay its creditors.
My Debts are Personal, Should I File Under 11, or 13?
Chapter 11 and Chapter 13 both offer businesses a way to keep their property by reorganizing.
Chapter 11 is the more popular choice for businesses. Still, it can be the right choice for some individuals, especially high-net-worth individuals with personal debt above the Chapter 13 limit. The Chapter 13 debt limit is $1,257,850 for secured debt and $419,275 for unsecured debt. For most individuals, however, Chapter 13 is less expensive and more manageable. Therefore, individuals rarely file under Chapter 11.
What is the Chapter 11 Plan of Reorganization?
The debtor’s plan of reorganization is a vital part of the Chapter 11 case. The plan details how the debtor will pay back creditors and, ultimately, emerge from bankruptcy as a viable, more robust business.
For 120 days after filing, the debtor has an exclusive right to file a plan of reorganization. The period may be extended for up to 18 months if the court finds good cause to do so. After that, the creditors or the case trustee, if one is appointed, can submit a competing plan.
Crafting a Reorganization Plan?
The Chapter 11 plan of reorganization explains how the claims for each class of creditors will be treated. A typical plan categorizes creditors as:
secured creditors who hold debt backed by collateral,
priority unsecured creditors who hold debt not supported by collateral who will be paid before nonpriority debt holders,
general unsecured creditors who are paid after priority unsecured creditors, and
equity security holders who hold equity security of the debtor, such as a shareholder interest.
Once the plan of reorganization is submitted, impaired creditors – creditors who will receive less than the value of their claim – vote by ballot to approve or reject the debtor’s proposal. At least one class of impaired creditors must vote to approve the plan before the court confirms it. The court will presume creditors to be paid in full vote “yes.”
In some cases, the court will confirm a plan even if an impaired class of unsecured creditors votes against it. When this occurs, it is called a “cramdown.” The court will cram down debt if doing so is fair and equitable to each class of impaired creditors.
A proposed plan of reorganization can be modified any time before plan confirmation. After the votes are in, however, the debtor must establish that a proposed change does not affect any creditors negatively. If the court decides there is an adverse impact on creditors, another round of ballots is required before the change can be accepted.
Creditors must also vote to accept competing plans. In deciding which competing plan of reorganization to approve, the court evaluates the interests of all creditors and equity security holders.
How Do I Get My Chapter 11 Plan of Reorganization Confirmed?
To be confirmed, your plan must meet specific requirements:
the plan must be feasible, meaning it can succeed
the plan must be proposed in good faith
the plan must serve the best interests of the creditors which requires paying the creditors as much under the plan as they would receive in a liquidation bankruptcy
the plan must be fair and equitable, meaning the secured creditors receive the value of their collateral, and no creditor receives more than their allowed claim.
If your plan satisfies these requirements, the court will likely confirm it.
What Happens After I File?
As with Chapter 7 and 13, once you file a Chapter 11 petition, the automatic stay takes effect to halt most collection efforts against you. Equally important, you become a “debtor-in-possession” and may continue to operate your business. Throughout the bankruptcy proceeding you will submit various reports and documents. Your attorney or your accountant typically prepares these. You will also pay quarterly administrative fees to the U.S. Trustee.
Your attorney is key to a successful Chapter 11 outcome. He or she will know how to craft the plan and other required documents to demonstrate that your business can recover from its financial difficulties. The plan will demonstrate to your creditors that a “yes” vote is in their best interests. It will also convince the court that your business will fairly and equitably pay its debt and recover.
At the Law Office of Ernest G. Ianetti, Esq., we work hard to solve the financial issues our small business and high-net-worth clients face. During your FREE initial consultation, we’ll review your situation and help you determine whether reorganization or liquidation is right for you. Then, we’ll go to work to achieve a successful outcome.
Ernest G. Ianetti, Esq., represents clients in Chapter 7, Chapter 13, and Chapter 11 Bankruptcy. Our office is conveniently located in the Rockaway Townesquare Mall complex. We represent clients from Morris County and surrounding areas, including Sussex County, Essex County, Union County, and Passaic County.
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