If you own or operate a business and find that it is collapsing under the weight of its financial obligations, you may consider Chapter 11 bankruptcy to help your business deal with debt.
A business filing for bankruptcy has two options. It can choose to file for Chapter 7 bankruptcy, commonly known as liquidation bankruptcy. Under Chapter 7, the business ceases as a going concern, and its assets are sold off to pay off as much of the company’s debt as possible.
Alternatively, a business may choose to pursue Chapter 11 bankruptcy, known as reorganization bankruptcy. The benefits of Chapter 11 bankruptcy are that the business will continue to operate and will ideally come out the other side of bankruptcy in much better financial health. Hopefully, as a more financially secure or profitable venture.
Another benefit of Chapter 11 bankruptcy, is that it also allows a business to resolve all of its debts and liabilities at once. A business can often secure more favorable terms by collectively negotiating with creditors in bankruptcy court than it otherwise could trying to negotiate with each creditor individually.
Moreover, a bankruptcy court’s decisions, including the decision to approve the reorganization plan, are binding on all of a debtor business’s creditors – even if a creditor disagrees with or does not like the decision.
If you own or operate a business that is struggling with financial problems that seem insurmountable, you should understand the benefits of Chapter 11 bankruptcy. In many cases reorganization represents a much better option than liquidation and closing down the business.
Listed below are six of the major benefits of filing for Chapter 11 bankruptcy.
If you have further questions about the Chapter 11 bankruptcy process and whether Chapter 11 represents the better option for your business, contact the knowledgeable North Carolina bankruptcy lawyers at Sasser Law Firm today for a free case review. We will discuss your business’s rights and options in bankruptcy.
1. Keeping a Business Running During the Bankruptcy Process
Unlike Chapter 7 bankruptcy, which results in the wind-down of a business’s operations and the liquidation of its assets to generate cash to pay off the business’s creditors, a business in Chapter 11 bankruptcy will continue running, albeit with court oversight for a period of time. When you’ve worked long and hard to build a business, you understandably don’t want to close it down due to financial difficulties. Chapter 11 bankruptcy allows you to continue business operations during the bankruptcy process so that you don’t lose your business and its goodwill and customer base.
2. Automatic Stay of All Creditor Actions
Among the most important benefits of bankruptcy includes the automatic stay of creditor actions to collect debt, including contacting your business to demand payment of debt, seizing secured assets, or filing lawsuits to obtain money judgments for unpaid debts.
The bankruptcy automatic stay enjoins all repossessions, foreclosures, lawsuits, liens, levies, and all other debt-collection activities. If a creditor continues debt collection activities after your business has filed for bankruptcy without first obtaining relief from the automatic stay from the bankruptcy court, any actions they take can be voided by the bankruptcy court and the creditors could face fines and penalties.
The automatic stay allows business managers to get some breathing room from aggressive creditors and debt collectors. This allows owners and managers to thoroughly evaluate the business’s financial situation, negotiate with creditors, and review its options in preparing a reorganization plan.
In a Chapter 11 bankruptcy, the automatic stay also gives a business the exclusive right within the first 120 days of the proceeding to propose a reorganization plan to the bankruptcy court. As a result, a Chapter 11 debtor can have significant control over the reorganization process.
3. Emergency Relief for Operations
Within a few days of a Chapter 11 bankruptcy filing, the bankruptcy court will schedule an expedited hearing to hear emergency motions relating to the business and its bankruptcy. This hearing represents an opportunity for the business to ask the court for the authority to undertake certain actions to continue the normal course of the business’s operations, such as continuing to pay wages and benefits to employees, filing and paying taxes, or meeting certain contractual obligations like rent, insurance premiums, or vendor invoices.
A company in Chapter 11 bankruptcy can obtain emergency relief to continue regular operations, which can give employees, vendors, and customers peace of mind that the bankruptcy will not severely disrupt the business’s operations. This is especially important for small business owners who typically operate on a month-by-month basis.
4. Possibility of Obtaining Loans at Favorable Rates
In addition to obtaining emergency authorization to continue regular operations of the business like paying employees or taxes, a business can seek emergency authorization for financing to help fund the business’s regular, ongoing expenses like payroll or supplies.
In particular, a business in Chapter 11 bankruptcy may seek debtor-in-possession financing. When the bankruptcy court authorizes debtor-in-possession financing, lenders can receive preferential terms when extending financing to companies in Chapter 11 bankruptcy, including having their debt enjoy priority over pre-petition debts and liabilities (even some secured debts).
This can give lenders more assurance that their loans will be paid before other debts in the bankruptcy case. As a result, businesses may obtain badly needed financing to continue regular operations at more favorable rates than they would have immediately prior to bankruptcy.
5. Treatment of Unexpired Leases and Executory Contracts
Leases and other executory contracts (contracts in which all parties have ongoing obligations) can often impose financial burdens that force a business into bankruptcy in the first place. A business that proceeds to Chapter 11 bankruptcy is permitted under the Bankruptcy Code to reject these types of agreements.
As a result, the counterparty to the contract becomes an unsecured creditor of any outstanding balances owed on the contract. Debtors may also choose to assign or assume contracts after curing any default. This means that the counterparty must continue performing under the contract, despite the fact that the business is pursuing bankruptcy, unless the company later chooses to reject the contract.
As a result, companies in Chapter 11 bankruptcy have great flexibility with respect to ongoing contracts. They can get out from under contracts that the company will no longer need in restructuring or that have proven no longer commercially sound, while still continuing to enjoy the benefits of performance under those contracts for which it cures any default.
6. Sell Property Free and Clear of Liens and Interests
As part of its restructuring, a business may decide to sell assets and other property that the business no longer needs, in order to generate needed cash to fund continued operations and the business’s restructuring plan. If these assets are encumbered by liens, encumbrances, or other competing interests, it would likely prove difficult to sell these assets outside of bankruptcy as the buyer would then be faced with the prospect of having to then spend money and time clearing the encumbrances on the property.
However, in Chapter 11 bankruptcy, a company may obtain court approval to sell assets and property free and clear of any encumbrances, liens, or other interests in the property that would otherwise hinder sale. As a result, a business often can find more interested purchasers and obtain a better sale price for encumbered property that it sells in Chapter 11 bankruptcy. That’s because buyers are incentivized to buy a distressed asset when the bankruptcy court issues an order protecting the buyer from any liens or other claims that could be asserted against the buyer under successor liability.
If your business is considering Chapter 11 bankruptcy as a means to help manage unsustainable debts and liabilities, Sasser Law Firm can help you and your business decide whether to pursue Chapter 11 and help guide your business through the bankruptcy process.
Our firm, focused exclusively on bankruptcy matters, has three board-certified bankruptcy specialist attorneys ready to work on your business’s bankruptcy case. Our legal team has extensive experience in both Chapter 11 and Chapter 7 bankruptcies. Over the past 20 years, our firm has helped over 7,000 businesses and individuals resolve their debts and financial issues through bankruptcy and other debt-resolution solutions.
We can help your business regardless of whether bankruptcy has been a long-planned event for your business or whether your business has been forced into bankruptcy due to an emergency. Our firm is prepared to take on your business’s bankruptcy case no matter how tough it is. We are prepared to fight for your business’s rights and interests, as we have appealed multiple clients’ cases, including several cases appealed to the 4th Circuit.
We will never pressure or obligate your business to file for bankruptcy, and we can help you explore alternatives to bankruptcy that might help your business deal with its financial difficulties.
Schedule a free, no-obligation, confidential consultation with a Chapter 11 bankruptcy lawyer at Sasser Law Firm today to learn more about how our firm can help your business with your financial difficulties. Call us or fill out the contact form on our website to get in touch with us now.
