Chapter 11 Bankruptcy for Businesses

The primary goal of Chapter 11 is to restructure debt and create a path to profitability, distinguishing it from Chapter 7 bankruptcy, which involves liquidating the business’s assets.

In this article, we’ll explain how Chapter 11 bankruptcy procedures work. If you’re considering a Chapter 11 bankruptcy case, consider working with a local bankruptcy attorney to ensure you’ve considered all of your options and follow the right procedures to get court approval.

Who Can File for Chapter 11 Bankruptcy?

Large corporations and partnerships often use Chapter 11 bankruptcy. The business owner in debt or its creditors can file for Chapter 11 bankruptcy. If creditors file, it is an involuntary petition. For example, Bed Bath & Beyond filed for Chapter 11 bankruptcy in April 2023, hoping to salvage the business by finding a buyer. Since then, the retailer has closed all its physical stores and now operates only online.

Qualifying small businesses can also file Chapter 11 plans. The Small Business Administration defines a small business as one with fewer than 500 employees. However, some small-business Chapter 11 bankruptcies are dismissed and converted to Chapter 7. This often occurs because the U.S. court decides the company has little or no chance of becoming profitable.

Sole proprietorships and partnerships can file for Chapter 11, but keep in mind that in both cases owners’ personal assets can be used to pay creditors.

Small business owners of real estate can also file for Chapter 11. This often includes office buildings, warehouses, and shopping centers. This is a single-asset real estate case under Chapter 11 and involves debtors with:

• Non-residential property
• Less than four residential units that generate almost all the debtor’s income

The Chapter 11 Process Step-by-Step

Companies that file under Chapter 11 of the Bankruptcy Code work with creditors to reorganize debt and restructure business operations. While the process can take several years, it generally follows a clear set of steps.

Filing the Petition and Triggering the Automatic Stay

You can file the voluntary petition with an attorney or on your own, and you must pay administrative and filing fees. Creditors can also force a business into an involuntary petition.

Small businesses must file the following forms with the court:

• The most recent balance sheet
• Statement of operations
• Cash-flow statement
• Most recent federal income tax return

Filing a petition triggers an automatic stay, which stops all collection actions unless the court indicates otherwise. Creditors and collection agencies can no longer call or harass you. They must stop all actions to foreclose or enforce liens against the business.

Operating as the Debtor in Possession

Once the petition is filed, the company operates as a “debtor in possession” (DIP). This allows the business to maintain control and continue day-to-day operations without interruption while developing a repayment plan under the bankruptcy court‘s supervision. Post-petition, the debtor must provide monthly operating reports to keep the court updated on progress.

The Role of the Creditors’ Committee

The U.S. Trustee will assign a creditors’ committee, usually comprised of the business’s seven largest unsecured creditors. The creditors’ committee helps oversee the company, investigate it, and participate in developing the reorganization and repayment plan.

Developing the Plan of Reorganization

The Chapter 11 debtor has an exclusive right to file a reorganization plan for 120 days after filing. The proposed plan may reduce costs, seek new income sources, and temporarily postpone payments. The company will renegotiate leases and contracts to help it become profitable again.

The plan will put stakeholders into different classes depending on how their claims are handled. A secured creditor is its own class, while unsecured claims are grouped into another class. Priority claims, like taxes and employee wages, are often addressed first. Creditors then vote on the reorganization plan before it is submitted to the court.

Confirmation Hearing and Debt Discharge

The bankruptcy court will confirm a reorganization plan if it is:

• Developed and structured in good faith.
• In compliance with all applicable laws.

Once approved, the court confirms the plan. The company must pay the remaining creditors and lenders according to the plan’s terms. Any debts that existed before the confirmation date but were not addressed in the plan are eligible for discharge.

What Are the Benefits of Chapter 11?

Chapter 11 bankruptcy restructuring has some key benefits that make it an attractive option for struggling businesses. These include:

• It avoids total liquidation of the business.
• Your business can stay in operation.
• It provides more time to develop and file a plan.
• It allows for reorganizing parts of the business that are not working.
• You retain control of your business as the debtor in possession.

Subchapter V: A Faster Path for Small Businesses

In February 2020, the Small Business Reorganization Act of 2019 (SBRA) created Subchapter V for small business owners.

This process moves faster and is cheaper than a standard Chapter 11 filing. It uses a private bankruptcy trustee to help you create and get approval for a consensual reorganization plan. Creditors cannot vote on the plan, which saves you a lot of time. As long as the plan is fair and equitable, the court should approve it.

You can file for this option if you:

• Meet the usual Chapter 11 requirements.
• Approve the courts having conferences on your case’s status in the first 60 days of the case.
• File the reorganization plan within 90 days of filing for bankruptcy.
• Can move quickly on timing and paperwork.
• Choose to file for it.

This subchapter has other requirements and details, so it is important to work with a local bankruptcy attorney to get it right.

Talk to an Attorney About Chapter 11

Being in debt can be overwhelming, but bankruptcy may be an option to help with your debt woes. Your business might need the protection afforded by a Chapter 11 bankruptcy filing. You’ll need outside expertise for a smooth process. You’re taking a large risk if you go it alone.

Bankruptcy laws are complex. If you’re considering bankruptcy, consult an experienced bankruptcy attorney who can explain your business bankruptcy options based on your situation.