Chapter 11

Bankruptcy for Businesses

An exclusive form of Bankruptcy is available for Corporate debtors and individual debtors who do not qualify for Chapter 13 because the dollar amount of their debts exceed the jurisdictional limits of Chapter 13.  Chapter 11 bankruptcy is available to such companies and individuals.  Many people think that only giant corporations qualify for Chapter 11, but many so-called "mom and pop" small businesses, such as used car dealerships, grocery stores and landlords can benefit from Chapter 11.  Under Chapter 11, the business continues in operation while it restructures its debts. Many businesses file Chapter 11 to pay certain taxes, like sales taxes, that could be assessed against the corporate members individually.  In Chapter 11, some tax penalties can lose their priority status, meaning that the tax debt could get satisfied in full for less money than what would be needed to satisfy the tax debt outside of bankruptcy.  Many people who operate small businesses file companion personal bankruptcy cases if there is a benefit to the debtor.  Every Chapter 11 case is different.  If you feel that your business could benefit from our services, contact us today at (585) 546-7410 to set up a consultation. 

Characteristics of Chapter 11 Reorganization

In Chapter 11 bankruptcy, the "debtor-in-possession" continues to operate the business.  Unless a different trustee is appointed by the Court for malfeasance, the debtor, as debtor in possession, acts as trustee (fiduciary) of the business.

Chapter 11 grants the debtor in possession a number of legal tools that can assist the debtor in the restructure of the business. A corporate debtor in bankruptcy may be able to obtain loans impossible to obtain prior to filing bankruptcy, by granting to creditors favorable status by giving these new lenders first position for payment from the business’ earnings. In Chapter 11, the debtor in possession may be permitted to cancel and/or reject contracts and lease agreements. Many of us locally know all too well that pensions and health care benefits for retirees from large corporate debtors can be rejected in Chapter 11 bankruptcy.  Debtors in Chapter 11 are also protected from being sued through the imposition of an automatic stay. While the automatic stay is in place, most litigation must be stayed, or put on hold, until the claim is resolved within the bankruptcy proceeding.  If the case is dismissed, the litigation resumes in its original forum.

The Chapter 11 Plan

Chapter 11 bankruptcy usually is designed to reorganize a company's business debts. Often times, Chapter 11 bankruptcy is utilized to reduce the personal financial exposure of the company's principal officers who may have give personal guarantees for the company's debts.  Chapter 11 debtors may be small or large corporate entities or may be individual debtors who do not qualify for Chapter 13.  Chapter 11 debtors may “emerge” from bankruptcy in a relatively short period of time.  Depending on the size and complexity of the bankruptcy, it may take several years to restructure a Chapter 11 debtor's debts. A Chapter 11 debtor usually is first in line to propose a plan to pay back debt in a restructured way. The plan may be proposed by any party in interest. Interested creditors then vote for a plan. Upon confirmation of a Chapter 11 plan by the presiding bankruptcy Judge, the plan becomes binding upon creditors for the duration of the plan.  At the conclusion of the Chapter 11 plan, the debtor does not receive a "discharge" of debts, unless the debtor is a natural person (i.e. NOT a corporate debtor).

Normally within the first 120 days of filing, debtors in Chapter 11 have the exclusive right to propose a plan of reorganization. After that time has elapsed, creditors may propose plans. Usually, a Chapter 11 plan proposed by creditors is NOT in the best interest of the debtor.  Therefore, it is necessary for a Chapter 11 debtor to be proactive and propose a plan in good faith for restructuring of debts within the 120 day period, otherwise the debtor may lose the confidence of the Court, who decides whether the debtor should be entitled to the protection of the bankruptcy court.  Chapter 11 plans need to satisfy a number of criteria in order to be approved by the bankruptcy court. Creditors will vote to approve the plan of reorganization. Generally, a Chapter 11 plan can be confirmed if at least one-half of the number of creditors and two-thirds in the amount vote for approval of the plan.  If a plan cannot be confirmed, the court may either convert the case to a liquidation case under Chapter 7, or dismiss the case.  The "best interests of the creditors," is normally the standard the law requires the Court to follow in considering a motion to dismiss or convert.  If the case is dismissed, then the debtor loses the protection of the bankruptcy court.  If the case is converted, then the assets of the corporation may be liquidated (i.e. sold and reduced to cash) and distributed to creditors. This is usually not in the best interest of the filing debtor.

If your business is struggling with debt and would like more information on Chapter 11 bankruptcy, I am here to help. The initial consultation is free and together we will formulate a plan to determine if Chapter 11 bankruptcy is right for you and/or your company. I offer personal attention and my rates are reasonable. Contact my office today online or by telephone at 585-546-7410 to speak with an experienced New York Chapter 11 bankruptcy attorney. 

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  • 45 Exchange Street,
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  • Rochester,
  • NY 14614

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