Is bankruptcy really necessary? You (or your attorney) may be able to negotiate an out-of-court solution or “workout” with your creditors.
Do you need a lawyer? Although attorney representation is not required by the Bankruptcy Code, most businesses will be much better off hiring an experienced bankruptcy lawyer. The bankruptcy lawyer can help you make the best decision regarding whether to file for bankruptcy (and which chapter is best for your company) and can also guide your company through the process. This is especially true in Chapter 11 proceedings, which can be extremely complicated.
Do you want to close your business or do you think you can operate on a profitable basis in the future? The type of bankruptcy your company files depends, in part, on the answer to this question.
If you want to continue operating your company, do you have a realistic plan as to how your company will return to profitability?
If you want to continue to operate your business, do you have the money to pay your bankruptcy attorney? Chapter 11 is expensive. Talk candidly with your attorney about the costs of filing a Chapter 11 case.
If you want to continue operating your business, is existing management capable of operating the reorganized company? You may need to hire a “turn around” consultant to satisfy your creditors if they think that existing management is not competent.
Are some or all of your company's debts guaranteed by you or others? If so, a bankruptcy filing does usually not stop collection activities against the guarantor(s) or cosigner(s).
Do you need immediate relief for a particular problem, such as foreclosure, repossession, garnishment, eviction or utility shut off?
Are you willing to expose your company to the court, to creditors, and to some extent to the public, during the bankruptcy process? There is no privacy in a bankruptcy proceeding.
Are you willing to comply with the many restrictions of operating a business in bankruptcy? Although you will be able to operate your business, you will be required to ask for court approval of anything that is not in the ordinary course of business.
Company Bankruptcy What to Expect
What you can expect when filing bankruptcy depends, in part, on what type of bankruptcy your company files. Here is an overview of what to expect under the three chapters available to businesses.
The first step in each case is to consult with an experienced bankruptcy attorney. Complete the intake questionnaire and provide it to your attorney at (or better yet, prior to) your initial consultation, along with all relevant documents.
If you and your bankruptcy attorney decide that filing a bankruptcy is the best alternative for your company, your attorney will request that you complete some worksheets. Your attorney will use the worksheets, along with the other information you have provided, to complete the bankruptcy petition and schedules. The bankruptcy petition and schedules are key documents in a bankruptcy – the petition is what actually commences the case in court, and the schedules set forth the financial information on which your whole case is based.
When the schedules are complete, your attorney will have you review and sign them. Your attorney will then file the documents with the appropriate bankruptcy court. When the petition is filed, something called the “automatic stay” goes into effect immediately. That means that collection activities by your company's creditors must stop. The filing of a bankruptcy case creates an “estate” consisting of all of the debtor's nonexempt property.
Chapter 7 is “straight liquidation” – your company's assets are, essentially, marshaled together and then divvied up between creditors according to a set of priorities laid out in the law. In a Chapter 7 case, a trustee is appointed to take possession of the property of the estate. Approximately twenty to forty days after filing the petition, you must attend the “first meeting of creditors,” also known as the “341 meeting” (named after the section of the Bankruptcy Code – section 341 – that provides for it). The trustee will ask you questions about your company's assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your company's financial condition. If your company does not have any assets, the bankruptcy case will end in about three or four months. If your company has assets, when your case ends will depend on how long it takes the trustee to gather your assets, sell them, and distribute the proceeds to your creditors. If the debtor is an individual, he or she automatically receives a “discharge” at the end of the case unless a creditor or the trustee objects.
Chapter 11 allows a company to restructure, according to a plan laid out in advance and agreed to by the parties and the court, and hopefully come out in the end as a solvent, going concern with a financial clean slate. If your company files under Chapter 11, your company becomes the “debtor in possession” with the right to retain the property of the estate and operate the business. Approximately twenty to forty days after filing the petition you must attend the “first meeting of creditors,” also known as the “341 meeting.” You will be asked questions about your company's assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your company's financial condition. The United States Trustee may appoint a “creditor's committee” which usually consists of your company's seven largest unsecured creditors. The creditor's committee consults with the debtor, investigates the debtor's conduct and financial condition, and participates in drafting the plan of reorganization. The debtor has the exclusive right to file a plan of reorganization for the first 120 days after filing. The debtor must also file a “disclosure statement” that contains financial information about the debtor and its business.
The plan of reorganization outlines how the debtor will deal with its creditors. The plan typically divides creditors into classes. Creditors vote on the plan of reorganization. Each class of creditors must accept the plan as it applies to that class. Usually, creditors that hold at least two-thirds in amount and more than one-half in number of the claims in a class must accept (vote yes to) the plan. However, if the court finds that the plan is “fair and equitable” and does not discriminate unfairly, the court may confirm (the legal shorthand for this is to “cram down”) the plan anyway. Plans may provide for payments to creditors over any reasonable period of time. Sometimes, payments on secured debts are extended over a period of twenty to thirty years.
Confirmation of the plan vests all property of the estate in the debtor and discharges all debts and liens that arose before the confirmation date except as provided for in the plan. The debtor has 180 days from the filing of the petition to obtain acceptance of the plan by creditors. Some plans (usually those that the debtor and creditors have mutually agreed to prior to filing) can be confirmed in two or three months. Usually, however, it takes between one and two years to confirm a plan.
Chapter 13 is for the adjustment of debts of an individual who has a regular income. A trustee is appointed in a Chapter 13 case, but does not take possession of the property of the estate. Approximately twenty to forty days after filing the petition, you must attend the “first meeting of creditors,” also known as the “341 meeting.” The trustee will ask you questions about your company's assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your financial condition.
Individuals engaged in business and filing under Chapter 13 must file a plan within fifteen days of filing a bankruptcy petition. The plan must devote all of the debtor's disposable income to payments under the plan for the next three to five years. The debtor must begin making payments under the plan within thirty days after the plan is filed. These payments are made not to the creditors but to the Chapter 13 trustee.
Creditors do not vote on the plan. If the plan complies with the requirements of the Bankruptcy Code, the court must confirm the plan. The confirmation hearing is usually held about four months after the case is filed. A discharge is granted when the debtor has completed all payments under the plan.