Chapter 11 bankruptcy is a bankruptcy option that is typically available to large corporations. This type of plan often referred to as a debt reorganization, is favorable for businesses because it allows them to keep running and making a profit while paying off their debts. There are many positive aspects of the plan, and a few negative elements to consider when weighing the different bankruptcy options. Below is a brief overview of the pros and cons of declaring bankruptcy under Chapter 11.
Pros of Filing Chapter 11 Bankruptcy
As previously stated, this type of bankruptcy gives the debtor a chance to reorganize debts. After filing a Chapter 11, the bankruptcy court issues an automatic stay that keeps creditors from attempting to collect repayment from the business. While the automatic stay is in place, the debtor works on a repayment plan.
A chapter 13 bankruptcy lawyer can help you make a plan that typically includes reduced amounts owed or reduced interest rates.
Meamnwhile, the repayment plan under Chapter 11 is called a reorganization plan. The business’s goal is to stay profitable while paying back debts, so they try to renegotiate contracts, leases, or other debts in order to get amounts reduced or discharged. Creditors are generally receptive to the repayment plan because they often get a payment plan that is more favorable than what they would get under Chapter 7.
Under the reorganization plan, creditors are placed in different classes with different priorities. Those that are the first priority would include state or federal tax agencies and unpaid employee wages or stock options. Each secured creditor is placed in its own class, and unsecured creditors are collectively placed in one class. Once the plan is confirmed by the court, the debtor is required to make all the payments to creditors as outlined in the reorganization plan.
Cons of Filing Chapter 11 Bankruptcy
While there are many benefits to Chapter 11, the biggest one being that business can continue to operate, there are some cons as well. A Chapter 11 bankruptcy is a long and costly process, which can be hard for businesses struggling to stay afloat. While it doesn’t force them to sell assets, it can cost them plenty in filing fees and legal fees. After their plan is confirmed, they will be paying off their old debts for a number of years.
In addition, the reorganization plan they develop must be feasible and approved by the bankruptcy court. Sometimes businesses have difficulty figuring out a way to get their company out of debt.
Not Just for Big Businesses
While Chapter 11 is often the choice for large corporations, small businesses have been known to file under this chapter as well. A small business is typically defined as one with 500 employees or fewer. A smaller business might choose Chapter 11 over Chapter 7 because it allows them more time to negotiate with creditors and work out affordable repayment plans.
Typically, Chapter 11 gives 180 days to work with creditors, whereas Chapter 7 only affords about 2 weeks to attempt renegotiations. Because Chapter 7 is geared more toward liquidating assets to pay off debts, it can be harder for small businesses to continue to run if they need to sell off their assets.
However, a small business may find Chapter 11 too costly to consider.
Although they won’t need to sell their assets, they will be looking at a filing fee that is higher than one in Chapter 7, and possibly higher court costs as well. If a business is trying to recoup some of its money, Chapter 11 may not be the best option.
Contact a Cleveland Bankruptcy Attorney
Both big and small businesses that are struggling financially might turn to bankruptcy as a way to help them get relief. The question they will be left with is, which plan is the right one? Turning to a knowledgeable Cleveland bankruptcy lawyer for advice is a great way to help get them started. The bankruptcy attorneys at Luftman, Heck & Associates have years of experience working with individuals, small companies, and larger corporations on their bankruptcy issues.