Chapter 11 Bankruptcy
Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows a business with unsustainable debt to propose a plan in which their debt is reorganized and restructured in an effort to return to profitability.
The Pros:
  • Filing for Chapter 11 bankruptcy immediately establishes an automatic stay. Creditors must cease all collection activity, including proposed and commenced lawsuits.
  • The debt reorganization plan usually includes reduced amounts owed and/or reduced interest rates, which ultimately means that debtors pay less.
  • Although creditors may receive less than full value owed, they are generally receptive to the debt reorganization plan — especially since they are likely to receive more than under a Chapter 7 bankruptcy filing (a.k.a. liquidation bankruptcy).
  • As noted above, during the execution of the debt reorganization plan, a business remains operational, and can in good faith communicate to concerned customers, suppliers, vendors, and other stakeholders the intent on re-emerging from bankruptcy (vs. preparing to wind down the business).
The Cons:
  • Relative to Chapter 7, the Chapter 11 bankruptcy process is longer, more complex, and costlier due to additional filing, plus administrative and legal fees.
  • The court will reject a proposed debt reorganization plan if it determines that it is not viable, compliant, realistic, and if there is no reasonable expectation that a business can return to post-bankruptcy profitability.
  • The court may impose restrictions on the compensation of a debtor’s “insiders” (e.g. officers, directors, major shareholders, etc.).
  • If the debt reorganization plan is accepted, during execution a debtor will need to seek the court’s approval to perform activities that are deemed outside the ordinary court of business. If the requested activities are justifiable in light of the goals and objectives of the plan, then they are likely to be approved.
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