Debts are piling up. Employees are stressed. The business just doesn’t seem to be working. You have a plan to fix things and become profitable again — but you can’t seem to catch a break to implement it.
You’re not alone.
In 2022 alone, nearly 5,000 businesses across the United States filed for Chapter 11 bankruptcy. For many small businesses especially, it’s the only option when debts get too high but the business owner wants to find a way to work off debts.
Keep reading to learn more about Chapter 11 bankruptcy and if it really “cancels” business debt.
What Is Chapter 11 Bankruptcy?
Often known as “reorganization bankruptcy,” Chapter 11 bankruptcy allows businesses to continue normal operations while simultaneously restructuring the business to restructure debts and plan a better repayment schedule.
Contrary to popular belief, declaring Chapter 11 bankruptcy isn’t a death sentence. It’s a chance to redefine the business, generate profit, and re-emerge stronger. Join the ranks of General Motors, Sbarro, and Texaco — who filed for Chapter 11 bankruptcy and came back stronger.
Does Chapter 11 Bankruptcy Cancel Debt?
Debt doesn’t disappear when you file for Chapter 11 bankruptcy. Instead, the filing establishes a stay from creditors so a business can take stock of assets, understand their outstanding expenses, and create a repayment plan admissible to all parties involved.
Why does this work?
Chapter 11 creates a potential win-win situation for businesses and creditors. Often, creditors receive more than what they’d get paid back if a company files for Chapter 11 rather than choosing to go out of business.
Repayment plans remain the heart of Chapter 11 bankruptcies. The courts and Chapter 11 bankruptcy lawyers help businesses navigate their tangled web of debts, assets, and other affairs or agreements to make a fresh start.
Please note: every situation is different and advice in this article may not echo your situation exactly. If you have questions or concerns about a Chapter 11 bankruptcy you’d like answers to, feel free to reach out to us via the contact form or give us a call.
What Debts Are Not Dischargeable In Chapter 11?
Not all debts are dischargeable under Chapter 11 bankruptcy filings. Those that fall outside the filing include:
- Certain tax claims.
- Child support and/or alimony payments.
- Any debts incurred from willful or malicious injury to person or property.
- Any outstanding debts to governmental units.
An experienced Chapter 11 bankruptcy attorney will help you decipher which of your debts will not benefit from Chapter 11 restructuring.
How Does A Bankruptcy Attorney Help With Chapter 11 Bankruptcy?
Working with a bankruptcy attorney remains essential for navigating the legal complexities that come with a Chapter 11 filing. Particularly, your attorney will help you protect your liabilities, counsel you through the next right step, and confer with the court and creditors on your behalf.
If you’re a small business, a bankruptcy attorney can work with you to identify if you’re eligible for the Bankruptcy Code’s streamlined process to file. Whether you’re a small, medium, or enterprise business, a bankruptcy lawyer will also guide you through the situation of a creditor violating the court’s stay.
Pros and Cons of Chapter 11 Bankruptcy
As mentioned above, filing for Chapter 11 bankruptcy provides businesses with a new start and court-outlined plan to repay debts. This affords several benefits to the business and their involved parties, like creditors. The advantages of filing for Chapter 11 Bankruptcy include:
- You can continue operations. While it won’t feel like “business as usual” with the restructuring you’re doing behind the scenes, Chapter 11 gives you the chance to keep generating revenue. This money helps tremendously when creating your repayment plan.
- Creditors aren’t breathing down your neck. Thanks to a stay from the court, you don’t have creditors breaking down your door anymore. They’re now involved in the process and have information on when and how you’ll repay them.
- You have the potential to receive emergency relief. After filing, the court allows emergency motions that often include the bank asking for authority to continue normal operations, paying wages, and similar actions. Even outside of the CARES act, businesses may find a grant or other type of emergency relief that further supports “business as usual.”
- You can sell assets without liens or interest. A common result of Chapter 11 bankruptcy restructuring is selling assets. Some businesses have assets encumbered by liens or compounding interest. Under Chapter 11, courts can approve business sales of these assets without the obstruction of liens and/or interest.
These advantages can help businesses put the right foot forward in their new start. However, before jumping to file Chapter 11 bankruptcy, educate yourself on some of the drawbacks, including:
- The complexity. There’s no getting around that Chapter 11 involves a lot of parties and a lot of debts needing repayment. The effort alone required to unravel the issues and put together a new plan motivates some to seek other avenues besides bankruptcy.
- The cost in legal fees. For businesses drawing in debt, the cost of legal fees to help navigate a Chapter 11 bankruptcy isn’t feasible to pay on top of the rest of the debt obligations.
- The court’s control. Under Chapter 11 bankruptcy, the court takes the lead in making several significant decisions for the business — and owners must confer with the court for approval to do things such as the sale of assets, retaining attorneys, and obtaining certain loans.
Filing for bankruptcy is a complicated and personal matter for business owners. At Dethlefs Pykosh & Murphy, we provide diligent direction and supportive advice throughout every stage of your bankruptcy proceeding. To learn more about how declaring Chapter 11 bankruptcy may help your business move beyond the red and into profitability, call your local DPM Bankruptcy Lawyers today to schedule a free case evaluation.