For small businesses, crippling debt can compound the stress of today’s fluctuating economic mobility. If your business dreams are held hostage by creditors, you may be considering your legal options under Chapter 11 of the U.S. Bankruptcy Code. The Rolesville business bankruptcy attorney of Bradford Law Offices helps organizations navigate the Chapter 11 process, unchain themselves from debt, and continue on the path to success and financial freedom. For a consultation, contact us at Bradford Law Offices today.
What Is Chapter 11?
Chapter 11 bankruptcy is essentially a “reorganization” of a business. Historically, struggling corporations made near-exclusive use of this option to stay afloat. Smaller businesses didn’t use it as much due to its expensive cost. The process has become more streamlined these days, and small businesses are increasingly using Chapter 11.
Many different classes of debtors can file Chapter 11, from individual Americans to large corporations on the stock market. The debtor will outline a way to reorganize their business and repay their debts. In return, creditors will pause their collections activities and discharge the remaining debt after the debtor completes the plan.
How Is Chapter 11 Different?
Chapter 11 bankruptcy is often compared to Chapters 7 and 13. What are the differences, and why might Chapter 11 have advantages for small businesses?
Many people think of Chapter 7 when they hear the term “bankruptcy.” A business that files Chapter 7 bankruptcy must appoint a trustee to sell off (“liquidate”) assets and use the cash proceeds to pay debts. The trustee must determine which assets the law allows the business to keep. However, with Chapter 11, the business can continue to operate. While the bankruptcy court must approve some decisions, the debtor will have more complete control over their operations. After the court approves a reorganization plan, the continued flow of income into a successful business can ease the repayment process.
Chapter 13 bankruptcy is also known as a “wage earner’s bankruptcy.” The filer will always be an individual, sometimes on behalf of a business, and they must have debt below a maximum cap. While they will propose and act on a repayment plan, the terms of that plan are more limited. For example, the debtor must finish within five years, paying commissions to a trustee who oversees their progress. Chapter 11, on the other hand, has no time limits, eligibility caps, or trustees. All the debtor must do is propose a reorganization plan, get the plan approved, and act on it.
How Does Chapter 11 Work?
As with other types of bankruptcy, Chapter 11 proceedings begin when a business’s legal team submits a petition to the appropriate bankruptcy court. Usually, this will be the court with jurisdiction over the area where the debtor incorporated the business. Virtually all of our clients file in the Eastern District of North Carolina. If your business is incorporated in another state, you should file in that state’s district.
From the time you file Chapter 11, an automatic stay of any collection activities against your business goes into effect. During the stay, creditors cannot:
- Ask for money from you
- Evict your business from rental property
- Sell collateral you’ve put up for loans (“foreclosure”)
- Garnish wages
- Proceed with lawsuits about unpaid debts
- Levy bank accounts
Since you’ll have temporary protection from collection actions, you’ll have more time to focus on drafting your reorganization plan by the deadline, which is a maximum of eighteen months from filing. A business owner, now called a “debtor in possession,” may choose to:
- Lay off unnecessary workers
- Consolidate redundant departments or divisions
- Close unproductive departments or divisions
- Sell unnecessary assets
- Renegotiate specific terms of a debt, such as interest or fees
The debtor in possession will then attend a “341 meeting” with a committee of representatives from their creditors. In this meeting, your lawyer will propose the plan to the committee. Creditors will reflect on the following questions:
- Is the plan likely to succeed, given the business’s trajectory?
- Would the creditors receive as much or more money through reorganization as they would through liquidation?
- Does the plan have good faith motives?
- Does the plan pay creditors the value of collateral?
After the creditors vote to approve the plan and the court signs off, it’s up to the business to obey the terms. While a debtor in possession has significant control in the execution of their plan, they need permission from the bankruptcy court to do specific tasks, such as:
- Hiring and paying lawyers
- Signing or leaving leases
- Taking out mortgages
- Selling assets that the owner wouldn’t sell in the course of regular business
- Expanding the business’s size and scope
- Shutting down the business or its operations entirely
After the debtor in possession has followed the reorganization plan to the creditors’ satisfaction, they will discharge the remaining debts. Typically, the Chapter 11 bankruptcy process could last up to five years from filing to discharge.
How Can Our Team Help?
- Determining whether you should file Chapter 11 or another type of bankruptcy
- Preparing and filing the petition
- Advising you on reorganization strategies
- Drafting the reorganization plan
- Representing you in bankruptcy court and at 341 meetings with creditors
- Offering counsel as you execute your plan
- Enforcing the automatic stay
- Fighting bad-faith creditors
Contact a Rolesville, NC, Chapter 11 Business Lawyer Today
If you’re a North Carolina business owner looking to escape debt, the Rolesville bankruptcy practice of Bradford Law Offices is ready to advise you. Our founder, Danny Bradford, has served the greater Raleigh-Durham area for 26 years and counting. From our humble beginnings representing construction companies, we’ve gained extensive experience with business bankruptcy proceedings across various industries. Whether you’re facing small business, construction, or real estate debt, we’ll diligently pursue the best possible outcome. Contact us at (919) 758-8879 for a no-obligation consultation.