Chapter 11 bankruptcy is a negotiation. As a result, it is imperative to consider strategies that keep your business alive during and after bankruptcy. Languishing in negotiation for a prolonged period of time can result in the liquidation, not reorganization, of a business.

Chapter 11 Discharge

In general, the goal of a bankruptcy is to obtain a discharge, wherein all “pre-petition” debt, or debt accrued from the time up to the bankruptcy filing, is wiped out. Through the bankruptcy process, a business will eliminate debts and emerge with the liabilities that the party negotiated with its creditors.

Reorganization

Conceptually, the United States Bankruptcy Code, or the Code, envisioned a bankruptcy process that is utilized to preserve a business as a going concern. The Code is considered debtor friendly because it strongly supports the idea of a debtor emerging from bankruptcy as a better, stronger organization. The Code believes that a business paying off its debt is better than a business no longer in existence; in other words, better alive then dead.

To that end, the bankruptcy process is leveraged to achieve a corporate reorganization, though businesses will often be liquidated via the bankruptcy process. Often, a business will file under Chapter 11 of the Code, which is the bankruptcy chapter devoted to a corporate reorganization, though it soon becomes apparent that the business will not survive as a going concern and will require liquidation.

To clarify, Chapter 11 is a reorganization whereas Chapter 7 is a liquidation. Under Chapter 11, a debtor seeks to renegotiate debt with the various creditors while keeping itself as a going concern. During the bankruptcy process, the business is under the jurisdiction of a bankruptcy judge and must motion to perform certain business acts, e.g. business acts that are outside the ordinary course of business. When the creditors agree on new liabilities or most of the creditors agree, subject to a cramdown (to be discussed at a later time), a business will seek to certify the negotiation from a Bankruptcy Court. Once approved, the debtor attains a discharge.

In contrast, Chapter 7 business debtors are not eligible for a discharge. Chapter 7 liquidates the business and sells assets to pay off creditors holding bankruptcy claims. While the business may operate at some level during the course of the bankruptcy, the purpose of the business operation is to wind-up the business. You may notice that retailers undergoing a liquidation will sell items at low prices just to liquidate inventory and repay creditors.

Dangers of Chapter 11 Bankruptcy

As mentioned, Chapter 11 is to reorganize. However, a long-winded negotiation can place significant pressure on a business to the point where a business does not recover. In such circumstances, some creditors may seek to convert the Chapter 11 into a Chapter 7 and force liquidation. If a Bankruptcy Judge agrees with creditors that a reorganization is unlikely then the Court will probably agree to convert the bankruptcy into a Chapter 7.

Therefore, it is imperative to have a comprehensive plan prior to filing for Chapter 11 bankruptcy.

Is your business in debt? Bankruptcy may be right for your business. Contact the debt relief firm of Melanie Tavare, an Oakland Chapter 11 bankruptcy attorney.