Reasons To File Chapter 11 Bankruptcy
The reasons for filing a Chapter 11 are as numerous and myriad as the scope and range of business in this country, and if done properly and timely, can be one of the most beneficial, and sometimes, the only way to save an otherwise doomed business.
Some Chapter 11 cases are filed to prevent foreclosure of valuable real estate property long enough to either sell or develop the property.
Others simply need time and protection from their creditors to trim expenses and improve profitability, or simply need to reduce the monthly operating expenses to an amount they can realistically pay.
Chapter 11's are commonly used to obtain an expanded time period within which to pay back all or part of the outstanding obligations, including the ability to stretch tax repayments to the IRS, EDD, etc up to six years. Tax creditors generally do not get to vote, and are stuck with the plan provided they are to be repaid within 6 years, and if they consent, the period can be stretched even longer. Generally speaking, a Chapter 11 is a reorganization of your financial affairs, as to monthly payments, and many times, as to the principal balance of your debts, without borrowing any money. It allows you to stop foreclosures, repossessions, tax levies, IRS seizures, and other creditor actions, by allowing you to set up a court enforced repayment plan. Immediately upon filing, the court will order an automatic stay against your creditors, to allow you some breathing time to concentrate on operating your business, and restoring its profitability and cash flow.
What Happens When You File Chapter 11 Bankruptcy
Essentially what happens upon filing the petition is that you immediately stop paying all unsecured debt, including taxes. You will, or may continue paying secured obligations, depending on what your situation and ultimate plan is. You may pick and choose which secured creditors to pay, and you can surrender unprofitable secured property and/or leases.
Many multi location debtors utilize Chapter 11 to close unprofitable locations, without being stuck for the full measure of breach of lease damages allowed under state law. The damages allowed for breach of leases are limited in a Chapter 11 proceeding.
This moratorium on paying unsecured debt continues until after you have a plan voted on by creditors, and confirmed by the court. This almost always takes at least 6 months or more, and commonly takes a year or more before you commence making payments pursuant to your plan. In some cases, it can take even longer. During this time, you operate your business with minimal restrictions imposed by the court. Generally you can continue to do whatever you normally would do in your business, without obtaining court approval. If you intend on taking some action outside the normal scope of your business, advance court approval is necessary.
To prevent professional persons (and insiders) from taking advantage, advance court approval is necessary to hire attorneys, CPA's, and other professional persons. The process is generally a routine rubber stamp administrative process, provided there are no conflict of interest problems. There are some judges who take the duty of approving the chapter 11 debtor