If you run a business that is otherwise making money but for your overwhelming debt, a chapter 11 may be your answer to staying in business. A chapter 11 bankruptcy is designed to restructure your company’s debts to stay in business. Your creditors would rather see you remain in business than liquidate. As angry as they may be, your creditors will likely see little or no money if you have to close your doors. However, if they can work something out with you through bankruptcy to keep you operating, then they are likely to see more, if not all, of their money. This is your leverage.
When your business files for chapter 11 bankruptcy, the automatic stay comes into place preventing your creditors from foreclosing on their loans. This means that they cannot seize property, equipment, or even end their contracts with you. You may be surprised at the last part, but it’s true. For example, a supplier must continue to supply you even if you file for bankruptcy. They may require cash up front, but they cannot cut off supplies just because you owe them money. The idea is for you to remain in business and reorganize to pay something to your creditors. The court wants you to continue to operate, and they may not realize it at first, but so do your creditors.
Now that your business has some breathing room, you can focus on restructuring your debts. As mentioned earlier, the goal is to bring your debt payments to a sustainable level. Again, your business operations are making a profit (you’re operationally profitable), but it’s your debt payments that are causing the problem. A sustainable level is when your operating profits cover your monthly debt payments. Lowering the monthly debt payments can be done in many ways: lowering the amount owed (principal), lowering the interest rate, extending the payment period, or some combination of those three. This is accomplished by negotiating with your creditors through the bankruptcy process. The goal of a chapter 11 is to file a Chapter 11 Plan that is reasonable for all parties. It is possible to force a plan (cramdown) on unwilling creditors. The bankruptcy court wants to see you remain in business and see that your creditors get more than if you go out of business.
So what happens if you’re not operationally profitable? Only if your operations are making money can a bankruptcy help you. If you’re close, then it may be possible to cut costs, freeze pensions, and/or use the power in bankruptcy to end unprofitable contracts, such as leases, to get your business operationally profitable. It may also be possible to get temporary financing through what’s called a DIP Loan. DIP Loans attract lenders by offering them a higher priority over your other creditors and are only available in a chapter 11 bankruptcy. I am a Chartered Financial Analyst (CFA) and can help you get there if you’re close.
Call or e-mail me for a free consultation to find out how a chapter 11 bankruptcy could save your business.
The above is for informational purposes only and does not constitute legal advice. Please seek advice from counsel.
