Patrick O'Malley

Chapter 11 Bankruptcy - Reorganization For Businesses

*** As a relief measure for distressed businesses, Chapter 11 underwent significant changes in early 2020 in response to the COVID-19 crisis. Read the details below. ***

Chapter 7 sells the filer’s assets to pay the creditors. Chapter 13 puts the filer—an individual or married couple—on a payment plan to pay the creditors. Chapter 11 is like Chapter 13, but it's normally for businesses, not people. Chapter 11 is a ‘reorganization’ bankruptcy. It has four applications.

Chapter 11-V for small businesses

Chapter 11 for large businesses

Chapter 11 for commercial real estate

Chapter 11 for individuals

The details vary in the specific Chapter 11 application. The theme that runs throughout all, is that the filer mostly retains control over the business and assets. The filer makes all the day-to-day business decisions, and must only get permission for big decisions. Also very important, in Chapter 11 many types of contracts can be altered, even when the other party does not agree. A Chapter 11 repayment plan must be approved by the court, and in some cases, by the creditors. In Chapter 11 the repayment plan does not have a specific time limit, unlike a Chapter 13. Often, the plan period will be up to two years, but it can last just a few months, or even decades. Until the payment plan is completed, there will be court supervision to protect the interests of the creditors.

Chapter 11-V for small businesses - Streamlined

The filer keeps full ownership and day-to-day control—with oversight and regular reporting to the court—and only needs pre-approval for major decisions. A plan is approved to restructure ongoing contracts and to repay some portion of the debts. Very importantly, there is no committee of creditors. This is very important because in other Chapter 11 cases, creditors must sign off on the repayment plan, making it much harder to successfully reorganize.

*** Update, Chapter 11-V took effect in February 2020, and then, responding to the pandemic, the filer’s debt ceiling was tripled, to $7.5M. Chapter 11-V, with this very temporary adjustment, is a powerful, cutting-edge tool. It arrived literally in the nick of time for the COVID-19 recession. ***

Chapter 11 for large businesses - Complex.

Due to the vast sums of money involved—think hundreds of millions, or even billions—Chapter 11 for large businesses is much slower and much more expensive than 11-V. This happens because the creditors have far more say in the reorganization plan than they do in a Chapter 11-V. Because of the increased debt ceiling from the March 2020 CARES Act, many larger, yet still relatively small, businesses can now benefit from the more streamlined and affordable Chapter 11-V.

Chapter 11 for commercial real estate - Powerful.

Real estate that is worth less than the debt that it secures is ”underwater”. When a filer’s property is underwater, the liens can be entirely eliminated and/or reduced down to the current market value of the asset. The liens that are reduced become unsecured debt, which typically receives pennies on the dollar in bankruptcies. Contracts can also be unilaterally revised. For example, a revised mortgage contract can lower the interest rate, and then be paid back over many years, or even decades. Depending on the size of the debts and the number of properties owned by the filer, Chapter 11-V may be especially useful for a distressed business with underwater real estate.

Chapter 11 for individuals - Rare.

Individuals typically will only file Chapter 11 if their income or asset situation disqualifies them from using Chapters 7 or 13. The case will proceed in a similar manner to a Chapter 7 or 13. There will be some very significant differences around the party who is in control of assets, and their ability to revise contracts, lengthening the repayment period and exempt property.

Liquidity strategies

A business reorganizing in Chapter 11 needs liquidity to fund payroll and all the other regular costs to keep the lights on and do business. A reorganizing company that foolishly runs out of cash is liquidated. Creating or ensuring this vital liquidity prior to the filing is vital. Doing it properly requires careful planning and strategy. Ideally, pre-filing liquidity will suffice, when added to profit margins from continued operations. If additional funding is needed, it may be possible to borrow against the bankruptcy case. This is called a debtor in possession loan. A DIP lender has a great incentive to lend to the bankruptcy estate. Their lien takes first priority over all other creditors, including secured creditors. The DIP lender might be a lender with a pre-existing banking relationship with the firm. There are also specialized lenders that provide operating loans to a company while it is in bankruptcy. Here at Business Bankruptcy Solutions, we have a network of vetted lenders who specialize in financing the business operations of a company in Chapter 11.

Contact us for help

Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances, and the tools we can use to achieve your goals. We draw upon decades of legal and business experience to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.