Chapter 11 bankruptcy is a type of bankruptcy that allows a company to reorganize its debts and business operations in an effort to become financially stable. It is a common option for businesses that are struggling but want to keep operating, as opposed to Chapter 7 bankruptcy, which involves the liquidation of a company’s assets to pay off debts.
To be successful in Chapter 11 bankruptcy, companies need to take several steps. Here are some key considerations:
- Develop a plan for reorganization: A company entering Chapter 11 bankruptcy will need to develop a plan for restructuring its debts and operations. This plan should be based on a thorough analysis of the company’s financial situation, including its assets, liabilities, and cash flow. The goal is to create a sustainable financial structure that will allow the company to continue operating and eventually emerge from bankruptcy.
- Seek the support of key stakeholders: Chapter 11 bankruptcy requires the involvement of a number of different stakeholders, including creditors, shareholders, and employees. It is important for a company to work closely with these groups and seek their support for the reorganization plan. This can be achieved through negotiations and compromises that address the concerns and needs of all parties. Creditors get to vote on a plan, so the plan needs to be persuasive enough to convince the creditors to support it (or at least not vote against it).
- Follow the guidelines set by the United States Trustee: The United States Trustee is responsible for overseeing the administration of bankruptcy cases, including Chapter 11 cases. Companies in Chapter 11 bankruptcy are required to follow certain guidelines set by the Trustee, such as submitting regular reports on their financial condition and progress towards reorganization. These reports are critical, because they are evidence of the company’s abilities to reorganize.
- Consider the Subchapter V bankruptcy option: In 2020, the Small Business Reorganization Act introduced a new subchapter of Chapter 11 bankruptcy, known as Subchapter V, specifically for small businesses. This option allows small businesses to reorganize their debts and operations in a faster and more streamlined way than traditional Chapter 11 bankruptcy. To be eligible for Subchapter V bankruptcy, a company must have debts of less than $2,725,625 (recently increased to $7.5 million) and must pass a “good faith” test.
In summary, companies entering Chapter 11 bankruptcy need to develop a comprehensive plan for reorganization, seek the support of key stakeholders, follow the guidelines set by the United States Trustee, and consider the option of Subchapter V bankruptcy if they are eligible. By taking these steps, companies can increase their chances of success and emerge from the process in a stronger financial position.
To learn more about Chapter 11, Subchapter V, and business reorganizations, contact WM Law for a free initial consultation or visit our website at www.kansascitybankruptcy.com. We love to help small businesses, because we are a small business too. At W M Law, “We Are Here to Help!”