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
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:
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
II. Debt Payments Under a Chapter 11 Plan
Most Chapter 11's involve adjusting three type of debts:
- Secured debt (bank loans)
- Tax debts
- Trade debt
- Reduction in debt amount
- Extension of the payment term
- Reduction in interest rate
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 |
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| 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 |
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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:
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