What is Chapter 11 Bankruptcy and How May It Protect Businesses?

Chapter 11 bankruptcy isn’t uncommon, yet many fail to see its purpose.

Most people have heard of Chapter 11 vs Chapter 7 liquidation, or even Chapter 11 vs Chapter 13 reorganization.

But what is Chapter 11 bankruptcy?

If you own a business (or a lot of assets), Chapter 11 bankruptcy might be useful to you someday.

Here’s what you need to know.

What is Chapter 11 Bankruptcy And How Does It Protect Your Business?

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy originates after Chapter 11 of the United States Bankruptcy Code.

Under Chapter 11, your business cannot file bankruptcy if, in the last 180 days, you had a bankruptcy petition dismissed because you did not appear in court.

You must also take a credit counseling course approved by the bankruptcy court.

In a nutshell, Chapter 11’s meaning is similar to Chapter 13 reorganization.

It allows you to reorganize your debts and get a fresh start with your business.

As with Chapter 13, a plan is filed in Chapter 11.

How Does It Affect Your Business?

Because Chapter 11 is not a liquidation but a reorganization, your business may stay open.

But you must meet certain requirements, or the court may dismiss the bankruptcy.

First, you need to file a bankruptcy petition.

Once the petition is filed, you must file “schedules.”

These have everything listed, including assets, liabilities, real estate, income, leaseholds, and more.

You must also file additional documents that the court requires, including but not limited to, a bankruptcy plan and statement of financial affairs.

The court assigns a judge and a trustee.

It also schedules a “341 meeting.”

This is a meeting with creditors, where they have a chance to contest your bankruptcy filing and/or plan.

During the meeting, the trustee may ask questions about your conduct, acts, properties, and the administration of the bankruptcy case.

At the same time, as soon as the petition reaches court, creditors may no longer attempt to collect any outstanding debts.

If you’re in good standing on certain accounts, you should continue to pay those debts.

Business Operations

A business may continue to operate during the bankruptcy proceedings.

You become a “debtor in possession,” which means you operate the business as you normally would.

If the case involves dishonesty, fraud, or gross incompetence, the trustee steps in.

You’re no longer allowed to make decisions without permission from the court.

This includes decisions about terminating rental agreements, starting new agreements, selling assets, expanding operations, or stopping them.

You must also report your monthly income and expenditures, employee withholding taxes, and new bank accounts (if applicable), to the trustee.

Failure to report gives the court authority to convert or dismiss the case accordingly.

The Automatic Stay

The automatic stay protects you from creditors.

As soon as you file bankruptcy, this stay goes into effect.

It stays in effect until the court dismisses the bankruptcy, or until you get the final decree.

A creditor cannot collect from you as long as the automatic stay is in place.

Also, a creditor may not file a lawsuit in state court against you.

If a lawsuit is ongoing, it is put on hold.

In some cases, the opposing party, in an existing lawsuit, may ask for relief from the stay.

That court may or may not grant the relief.

As long as the stay is in place, your business is protected from creditors.

Getting Out of Financial Trouble

If your company is in financial trouble, ask your attorney, “What is Chapter 11 bankruptcy?” and “Is filing Chapter 11 the best course of action for your business?”

Chapter 11 may allow your business to reorganize it’s debts, and get out from under certain debts, all while your business continues to run.

Through the plan, debts are paid off or paid down and then, dismissed.

However, you must still pay the current payments on secured debt, such as a real estate mortgage.

What is Chapter 11 bankruptcy? Check out this video by Khan Academy where they discuss everything you need to know about it:

Applying for Chapter 11 bankruptcy is the ideal step to take for business owners who are struggling financially.

Ask your attorney and credit adviser what Chapter 11 bankruptcy is.

They can help you determine how to save your business from repossession.

The key to getting out of debt is to take the necessary legal steps needed as soon as possible.

Did we help you understand what Chapter 11 bankruptcy is and how it can save your business? Feel free to share your thoughts with us in the comments section below. We would love to hear from you!

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