<\/p>\n
With the economic changes unleashed by the coronavirus crisis, many organizations are facing major changes in their workforce, workplace, and business procedures. Some companies have even had to declare or consider filing for bankruptcy.<\/p>\n\n
Bankruptcy might sound dire, but having to file for bankruptcy doesn\u2019t necessarily mean your business has failed. Many companies, large and small, have filed for and recovered from bankruptcy.\u00a0But the outcome of a bankruptcy case partially depends on the type of bankruptcy filed.\u00a0Bankruptcy can be anything from liquidation to a reset button for businesses facing challenging times.<\/p>\n\n
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Chapter 7 and Chapter 11 are two of the more common types of bankruptcies businesses chose to file. What’s Chapter 7 bankruptcy and what’s Chapter 11 bankruptcy? And what\u2019s the difference?<\/p>\n\n
Filing for Chapter 7 essentially shutters the company\u2014operations are not continued and all assets are liquidated and divided among creditors.\u00a0Chapter 7 is\u00a0intended for businesses that are too far in debt to have any chance of financial stability in the future.<\/p>\n\n
Chapter 11, on the other hand, allows the company to restructure and\u00a0hopefully move on and be a profitable business.<\/p>\n\n
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So what\u2019s chapter 11 bankruptcy?\u00a0A business that files for Chapter 11 can continue to operate while its debt payments are being suspended or restructured, allowing the company to get back on its feet. (Specifically, this type of filing suspends collections, foreclosures, judgments and repossessions of property against the company. More on this later.)<\/p>\n\n
Chapter 11 can be filed voluntarily or involuntarily. Creditors can force it on the company (if three or more file a petition with the bankruptcy court).<\/p>\n\n
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What’s Chapter 11 bankruptcy and why would a company file Chapter 11? Chapter 11 is a good option for businesses that still have regular income and assets. It\u2019s used to reorganize debt\u2014and hopefully give the company a fresh start.<\/p>\n\n
Filing comes with some benefits for struggling companies. It\u2019s possible the company could defer certain payments (such as rent), lower interest rates on some loans, and extend payment plans. However, the biggest advantage is that the company can continue to operate.<\/p>\n\n
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Typically, once Chapter 11 has been filed, the business (or debtor) has 4 months to submit their reorganization plan. In some cases, the timeline can be extended to up to 18 months. If the company doesn\u2019t submit a plan in the agreed-upon timeline, the creditors can propose a plan.<\/p>\n\n
Once a plan has been submitted, the creditors must vote on the plan for it to be approved by the bankruptcy court. It is possible for creditors to reject a company\u2019s plan (although they usually don\u2019t, given the alternative is a Chapter 7 filing).<\/p>\n\n
If creditors do reject the plan, the debtor can request a \u201ccram down,\u201d which essentially forces creditors to accept it.<\/p>\n\n
Going forward, the plan serves as a contract between the company and the creditors. It spells out how the company will pay for expenses and operate. Usually, that plan involves\u00a0downsizing<\/a>.<\/p>\n\n Along with the plan, the business must submit a disclosure statement containing specifics about the company\u2019s assets,\u00a0liabilities, and\u00a0business affairs.<\/p>\n\n <\/p>\n\n Unlike other types of bankruptcies, there is no initial appointment of a trustee in a Chapter 11 filing. It leaves the\u00a0debtor in possession<\/a>. Thus, there\u2019s no requirement for debtors to hand their disposable income to a trustee. In fact, the appointment of a trustee for a Chapter 11 filing is more the exception than the rule\u2014most often for cases that involve fraud, for example.<\/p>\n\n If for some reason the company doesn\u2019t meet any of the agreed-upon obligations, the court can assign a trustee. In certain instances, a trustee will be appointed because the case is converted to a Chapter 7.<\/p>\n\n Note: This is a little different than the\u00a0role of a U.S. Trustee<\/a>. The U.S. Trustee\u2019s responsibilities include tasks such as monitoring cases for bankruptcy fraud, appointing trustees to cases and arranging creditor meetings. They\u2019re there to provide oversight.<\/p>\n\n <\/p>\n\n For Chapter 11 filings, the U.S. Trustee may also appoint an official committee of unsecured creditors, or Creditors\u2019 Committee. The committee is in place to represent the best interests of all the unsecured creditors\u2014not any individual or individual creditor. The committee is there as a safeguard.<\/p>\n\n Typical creditors\u2019 committees are made up of three to seven members that hold the largest unsecured claims, and they work directly with the filing company\u2019s legal counsel. What does the committee do?<\/p>\n\n A creditor\u2019s committee can investigate the debtor\u2019s management or transfer of assets, they help draft the disclosure statement and reorganization plan (mentioned earlier), and they help appoint a trustee should that become necessary.<\/p>\n\n Creditor\u2019s committees can hire\u00a0attorneys, accountants or other professionals to work on their behalf (as approved by the U.S. Trustee).<\/p>\n\n <\/p>\n\n If the filing company is a small business (sole proprietor, corporation or partnership), there won\u2019t be a creditor\u2019s committee. Instead, that oversight becomes the responsibility of the U.S. Trustee.<\/p>\n\n After filing, the debtor will attend an interview with the U.S. Trustee. They\u2019ll evaluate the business plan and review the debtor\u2019s obligations (such as filing regular financial reports).<\/p>\n\n What qualifies as a small business debtor?<\/p>\n\n <\/p>\n\n Along with a lack of a creditors\u2019 committee, cases for small business debtors have a few other provisions:\u00a0the debtor has only 300 days to propose a Chapter 11 plan, no disclosure statement is required, and there are additional filing responsibilities.<\/p>\n\n <\/p>\n\n What’s Chapter 11 bankruptcy’s meaning for real estate owners? Real\u00a0estate\u00a0owners and developers face restrictions when it comes to filing Chapter 11. To be considered single asset real estate, the money received by the owner must be passive. This means that owners can’t\u00a0be actively conducting business other than activities such as maintaining the property and collecting rent.<\/p>\n\n There are also differences when it comes to the automatic stay.<\/p>\n\n <\/p>\n\n As soon as the bankruptcy petition is filed, the automatic stay goes into effect. This is the period of time when all collections, judgments and repossessions are suspended. Creditors are not allowed to attempt to collect any debt incurred before the filing.<\/p>\n\n While it provides some immediate relief, the automatic stay doesn\u2019t erase debt. And it doesn\u2019t cover lawsuits, etc. that are initiated after filing.<\/p>\n\n An automatic stay can be lifted for various reasons including \u201cfor cause,\u201d if the value of the collateral property does not exceed the amount of money owed on it, or if the stay is not necessary for reorganization.<\/p>\n\n The rules and timeframe of the automatic stay vary depending on the case.<\/p>\n\n <\/p>\n\n The court does have the right to convert a Chapter 11 bankruptcy case to a Chapter 7. Usually what happens is the company is not bringing in the expected income. If money continues to be lost, the court will step in.<\/p>\n\n Another reason for conversion is gross mismanagement or fraud. The court can also decide to convert the case if there\u2019s an unexcused reporting or filing failure, failure to attend meetings or failure to pay post-petition taxes in a timely manner, among other reasons.<\/p>\n\n <\/p>\n\n Only a minority\u00a0of Chapter 11 bankruptcy cases result in a successful reorganization of the company. Most cases are either converted to Chapter 7 cases or dismissed. Chapter 11 cases can be long and expensive, so it\u2019s not something to take lightly. But, if the company has been relatively stable and is simply dealing with rough times, a Chapter 11 is worth considering.<\/p>\n\n If your company is in the process of filing for Chapter 11, you might be expecting a workforce reduction. Having to let good employees go isn’t pleasant, but you can help make their transition a little easier (and\u00a0protect your brand’s image<\/a>) by providing outplacement. With\u00a0Intoo’s outplacement services<\/a>, you can provide career counseling, resume assistance, and coaching to your departing staff. If you’d like to learn more about how Intoo can help, please\u00a0schedule a demo<\/a>.<\/p>\n \u00a0<\/p>\n <\/p>","protected":false},"excerpt":{"rendered":" With the economic changes unleashed by the coronavirus crisis, many organizations are facing major changes in their workforce, workplace, and business procedures. Some companies have even had to declare or consider filing for bankruptcy. Bankruptcy might sound dire, but having to file for bankruptcy doesn\u2019t necessarily mean your business has failed. Many companies, large and […]<\/p>\n","protected":false},"author":4,"featured_media":8320,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[69,15,79],"tags":[191,185,84,140,63],"class_list":["post-8318","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-hr","category-intoo","tag-bankruptcy","tag-covid-19","tag-crisis-communication","tag-human-resources","tag-outplacement"],"yoast_head":"\nTrustees<\/strong><\/h2>\n\n
Creditors\u2019 Committees<\/strong><\/h2>\n\n
Small Business Debtor<\/strong><\/h2>\n\n
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Single Asset Real Estate Debtor\u00a0<\/strong><\/h2>\n\n
The Automatic Stay\u00a0<\/strong><\/h2>\n\n
Converting to Chapter 7 Case
<\/strong><\/h2>\n\nAre Chapter 11 bankruptcies successful?\u00a0<\/strong><\/h2>\n\n