Chapter 11 Bankruptcy
Chapter 11 of the United States Bankruptcy Code is designed to protect business debtors and their creditors. For a company that is struggling to cover its overhead and operating costs due to debt payments, Chapter 11 allows a company to protect itself from creditors, temporarily stop debt payments, collection activities and foreclosures in order to analyze its business model, all while remaining in business
Upon filing a Chapter 11 petition, all collection activities are stopped. Collections on outstanding judgments, payments toward unsecured debts, including trade debt, will be stopped pending submissions and approval of a Plan of Reorganization. Payments on secured debt, including mortgages, automobile loans, equipment loans and even bank loans and lines of credit that are secured by a blanket lien on accounts receivable and other forms of security, can usually be postponed for 30-90 days, depending on the circumstances, and then payments may very well be reduced while the company reorganizes its operations to become profitable.
After filing a petition, a company will remain in possession of all its assets and may continue to operate the business. Unless extended by the Court, a company has 120 days to develop and submit to the Court and its creditors a Plan of Reorganization, which provides the company the benefits of:
- Decreasing the principal amount of each secured loan to the fair market of the collateral at the time of filing;
- Negotiating a reduction in the interest rate and an extension in term for each secured loan up to five years from the date of filing;
- Reduction in the overall amount of unsecured debt and the opportunity to extend repayment over five years.
Any company that could benefit from these legal remedies should discuss specifics with competent legal counsel.