Posted: March 26, 2020
Chapter 11 is certainly the answer, if the question is how does a business survive and restructure its debts in this economic climate. Chapter 11 of the Bankruptcy Code is the mechanism by which business entities, or in limited circumstance for people with very large debts owed, restructure their debts by proposing a plan of reorganization to allow for the payment of obligations over a term of years. The filing of a bankruptcy immediately stops all lawsuits or collection actions by creditors, as well as stopping the accrual of interest on tax debt and unsecured debt. The filing will give a business breathing space to strategically negotiate with secured lenders, landlords, and trade creditors for beneficial treatment.
A plan of reorganization will allow you to cure arrears to a secured creditor over a term of years and stops the interest accruing on the default amount. Similarly, it will allow you to pay any tax claims that you have over a period of years. Finally, for unsecured creditors (such as lines of credit, credit cards, and trade vendors) you can seek to pay them a very small portion of the debt owed, which is historically mere cents on the dollar. It is critical to note, however, that a plan is subject to a vote by your creditors, and if you cannot obtain enough votes of approval, the Court may not confirm the viability of the proposed plan.
There are many legal benefits of filing Chapter 11, other than the plan of reorganization. Unexpired contracts that contain provisions that are economically harmful can be rejected outright, although that creditor will then possess a rejection damage claim. But typically that type of claim is only entitled to a very small pro-rata portion of the ultimate distribution under the plan. Alternatively, if a contract is in breach, but you want to keep that contract, you can assume it and enter into negotiations as to what a viable cure payment of the arrears would be, as well as seeking to stretch the term of payment out over the course of years. If you are behind on utility payments, Chapter 11 gives you the ability to force those utility companies to continue to provide you with services, subject to the payment of a deposit, which is typically equal to 1.5 months of your average use.
In cases where the business is a single asset real estate company, Chapter 11 can be utilized as a mechanism to stop a pending foreclosure action or sale and give you the opportunity to try and sell the property on the open market at an auction, as well as the time to negotiate with the lender to attempt to reduce the total amount sought. This may not be done if the secured lender is the only creditor, the business must have other creditors that need to be paid, otherwise this is a two-party dispute and the case may be dismissed by the Bankruptcy Court.
A Chapter 11 is referred to as a debtor-in-possession. In plain English this means that the debtor (business) is the party in actual control of the bankruptcy process. This is very significant, as this means that you do not have a third-party trustee or receiver as the party making the day to day or strategic decisions of how the case should proceed. You have the control, subject to the mandatory reporting requirements of the United States Trustee, as well as certain disclosure conditions that your secured lender might seek.
Chapter 11 is the answer to save your business. It is, however, a complex legal process, with significant benefits for those in need. It is critical that you consult with an experienced bankruptcy lawyer to go over all of your options and to understand your rights.
For assistance with all Bankruptcy matters, please contact us:
Ken Kirschenbaum, Esq. (516)-747-6700 Ext. 301 or firstname.lastname@example.org
Stacy Spector, Esq. (516)-747-6700 Ext. 304 or email@example.com