Thursday, February 16, 2012

What is a Chapter 11 Bankruptcy?

A Chapter 11 Bankruptcy is a legal option under bankruptcy law to reorganize your business while continuing to be in control of the business.   In Chapter 7 bankruptcy and in Chapter 13 Bankruptcy a Trustee employed by the Court system is responsible for managing the "bankruptcy estate" and, in essence, owns all property for the benefit of the creditors.

What is a "bankruptcy estate"?   In Chapter 7 it is any property that is not "exempt"; property that is to liquidated to pay creditors.  In Chapter 13 is includes the income of the Debtor.   In both Chapter 7 and Chapter 13 YOU ARE NOT IN CHARGE.

In Chapter 11 bankruptcy YOU ARE THE TRUSTEE, YOU ARE IN CHARGE.   With Court approval, you determine what to sell to pay debts and what income stream is available to pay creditors.  Your responsibilities include opening new bank accounts designating that you are a "Debtor in Possession" and filing monthly operating reports.   You have certain time limits to propose a "Plan" to reorganize your business,  get rid of unprofitable business decisions such as unprofitable leases or other contracts, and to negotiate a payment plan for past due debts.   Simply put, you get time to save a business in trouble but one that still could be profitable in a new form.

In small businesses the two major problems I see are businesses that are behind in payroll or sales taxes, hoping that an upturn will provide the needed capital, or businesses that have a balloon note that has come due or is behind.   Chapter 11 can be a good tool to resolve both of these issues.

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