You worked hard for your business. As the country reels from the staggering economic effects of COVID-19, there are options available. We strive to provide our clients with the tools and expertise needed to navigate this tumultuous time and are committed to helping our clients weather the reorganization process.
A business bankruptcy is most often a voluntary legal proceeding filed by a financially troubled company seeking protection from its creditors. Two types are available - a Chapter 11 filing brought to financially reorganize or restructure the business, and a Chapter 7 filing seeking to liquidate the business.
Bankruptcy can indeed be a valuable tool for a financially troubled company. Yet the expense, operation and administration of even a modest Chapter 11 case can be daunting for a small or medium size business with just a few creditors. Other options should therefore be investigated. Debt relief may sometimes be accomplished through negotiating extended payment arrangements with creditors or through assignments for the benefit of creditors, composition agreements or litigated or non-judicial workouts.
A Chapter 11 filing typically permits management and owners of a financially distressed business to continue operating the business under the protection of the bankruptcy court without outside interference from creditors. Immediate attention must often be given to retention of professionals, continuation of banking relationships and availability of credit, as well as resolving prepetition payroll issues. In addition, after notice and a hearing, the bankruptcy court may allow the debtor to sell off unprofitable assets or reject burdensome leases, and other steps may be pursued to control costs.
The debtor is generally given 120 days to file a plan of reorganization for creditor consideration and vote. The debtor normally uses this time to negotiate the plan of reorganization with its secured and unsecured creditors. The plan of reorganization most often provides for partial payment of unsecured debts over time. Creditors or other parties may file competing plans. A Chapter 11 filing works well for a business behind in its unsecured debt payments, with some cash on hand and a regular cash flow. The purpose behind a Chapter 11 is to give the company enough breathing room and sufficient opportunity to operate without worrying about paying old bills the debtor hopes it will be in a position to reorganize its financial affairs through the confirmation of a Chapter 11 plan.
More information about our Chapter 11 Bankruptcy practice can be found here
The purpose of a Chapter 7 bankruptcy, on the other hand, is to liquidate the business debtor's assets. Upon the filing of a Chapter 7 bankruptcy a trustee is appointed to take charge of the debtor's business. The trustee may continue to operate the business for a short time or, more typically, take steps to close the doors and immediately collect, market and sell off the assets. The trustee's job includes the collection of all real and personal property, including cash, accounts receivable, pending lawsuits, sale proceeds, inventory, valuable leases, and rights of action, including voidable preferences and fraudulent conveyances.
In February 2020, the Small Business Reorganization Act (“SBRA”) went into effect, bringing some dramatic changes to the Chapter 11 bankruptcy process for small businesses. The law is codified at subchapter V of Chapter 11 of the Bankruptcy Code and the small business cases are sometimes called subchapter V cases. The purpose of the legislation was to remove some of the impediments in the Bankruptcy Code that prevented smaller businesses from being able to successfully confirm plans of reorganization and to make the process faster and more efficient for smaller bankruptcy cases.
Unlike a typical Chapter 11 bankruptcy, the small business bankruptcy moves very fast. The Bankruptcy Court will hold a status conference within 60 days from the filing date. At least 14 days before the status conference, the small business must report in writing on the efforts made, and to be made, to get a consensual plan. The small business must then file its plan or reorganization within 90 days from the filing. Unlike a typical Chapter 11 bankruptcy, only the small business can file a plan.
More information about our Small Business Bankruptcy practice can be found here
If you would like more information concerning business bankruptcy and its alternatives, please contact the firm via the contact form below.
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