Chapter 11 Bankruptcy

"Business Reorganization"


Eligibility


Individuals, partnerships, and corporations are eligible to file chapter 11.

The Key Question


In considering a chapter 11, the key question is:

"If my company were debt free, would it generate a positive cash flow (revenue exceeding expenses)?"

If the answer is yes, the company has the foundation to reorganize.

Basic Principles of Chapter 11


"Half of loaf is better than none" - why Creditors Support a Chapter 11

If a business is faced with closing, it can use Chapter 11 to make an arrangement with its creditors to stay in business. Creditors normally will get a better return on their claim under a reorganization plan than they would if the business were closed. For this reason creditors normally will support the plan.

No Downside

When without the chapter 11 the business will close, there is no downside from using the reorganization process to attempt to save it.

Breathing Spell

The filing of a Chapter 11 stops all collection lawsuits. Its gives the business a breathing spell from creditor pressure. Plan payments to creditor will normally begin about one year after filing. During this one year, the business has an opportunity to build a cash reserve and improve its business model to increase profitability.

3 Goals of the Chapter 11 Plan

  • Preserve the company
  • Pay debts in installment payments (often less than 100%)
  • Create a positive cash flow

The "Reorganization Plan" - how it works


Chapter 11 Overview

Most Chapter 11's involve adjusting three type of debts:

  • Secured debt (bank loans)
  • Tax debts
  • Trade debt
Debt Adjustment - There are three ways debts are adjusted:

  • Reduction in debt amount
  • Extension of the payment term
  • Reduction in interest rate
Illustration: The following two tables illustrate adjustments of debts through a plan which fits the company's cash flow.

Change in Debt Payments

OLD: $11,000 per month prior to the Chapter 11 (Table I)
NEW: $6,200 per month under a plan (trade debt is paid 30%) (Table II)

I. Debts Payments Prior to Filing a Chapter 11

Creditor Debt Interest
Rate
Term
(Months)
Months
1-24
Months
25-48
Months
49-50
Bank Loan 250,000 8% 48 5,860 5,860 0
Truck Loan 20,000 8% 24 905 0 0
IRS 100,000 3% 24 4,300 0 0
Trade Debt 100,000 0 0 0 0 0
Total
460,000
11,066
5,860
II. Debt Payments Under a Chapter 11 Plan

Creditor Debt Interest
Rate
Term
(Months)
Months
1-48
Months
49-60
Months
61-84
Bank Loan 250,000 5% 84 3,533 3,533 3,533
Truck Loan 15,000 5% 48 345 0 0
IRS 100,000 3% 60 1,842 1,842 0
Trade Debt 30,000 0 60 500 500 0
Total
385,000
6,220
5,875
3,533

Legal Guidance


Experience: A chapter 11 is the most complex of all of the bankruptcy chapters. There are many factors which must be considered. It is essential that a person or business considering a chapter 11 obtain guidance from an experienced chapter 11 bankruptcy lawyer.

Fees: Chapter 11 representation is on a hourly basis. The total fee for the case varies widely depending upon complexity of the case. Prior to filing the chapter 11:

  • Counsel reviews the company's circumstances
  • An explanation is given of the benefits of using a chapter 11
  • An estimate for the cost of the case is provided

 
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