Why Chapter 11 Bankruptcy Remains to be an Attractive Option for Many Businesses Facing Significant Financial Problems

Insolvency, or the inability to pay debts, places any business at risk and though no firm will want lose more money than what it earns, when debts reach an amount which a firm can no longer pay, then it will have to find ways to immediately to save itself from such debt without needing to cease operations.

The good new is, there are actually a number of legal options that a business can pursue to get out of debt to regain solid financial footing; one of these options is bankruptcy.

The U.S. Bankruptcy Code offers individuals, families and companies several paths which will help them rise up from a debt crisis. These paths are contained in various chapters of the Bankruptcy Code and each chapter is specifically calculated to address the unique tight spot a debtor is suffering from.

Businesses, particularly, have three bankruptcy chapter options to choose from:

  • Chapter 7, which is a liquidation bankruptcy. This chapter requires that a business stops operation and all its available assets surrendered to a court-appointed trustee for liquidation. The earnings from the sale will be distributed to creditors to pay the firm’s debts.
  • Chapter 13, which is reorganization or restructuring bankruptcy. It is designed for sole proprietorship business structures, though it may also be filed by individuals who have either an unsecured debt that is less than $383,175, or a secured debt that is below $1,149,525. These debt limits are set by the federal government, which has complete jurisdiction over bankruptcy matters. In this chapter, the court will require a restructuring of the debt payment scheme (a three-year payment plan but which may be extended to five years upon the court’s approval) – after which all debts should already have been fully paid; and,
  • Chapter 11. Though this bankruptcy chapter is the most expensive, time-consuming, complex and riskiest, it the only option for sole proprietors, whose debts exceed the limit set in Chapter 13, as well as for small businesses structured as corporations, limited liability companies or partnerships that owe overwhelming debts, but would not want to cease operations (many well-established corporations, like United Airlines, K-Mart and General Motors have sought protection under this chapter).

Chapter 11, specifically, allows debtors to restructure their finances through a bankruptcy court-approved reorganization plan. This restructuring scheme is intended not only to keep a business alive, operational and profitable (under the court’s close monitoring), but also to ensure that creditors are paid the amount owed to them. Debtors also have the option to sell a few or all of their assets to downsize their business if they need to.

According to a Raleigh Chapter 11 bankruptcy attorney, despite the risks, many businesses facing significant financial problems see Chapter 11 bankruptcy an attractive option due to its benefits, which include:

  • The ability to keep a business running during the bankruptcy process;
  • Protection against creditor harassment;
  • Possibility of obtaining loans at favorable rates; and,
  • Litigation against the debtor is put on hold.