What Is Chapter 11 Bankruptcy? The Basics Explained

Are you wondering, “What is Chapter 11 bankruptcy?” If you’re considering filing for one of the types of bankruptcy, you need to weigh the pluses and minuses. You may be able to reorganize your finances and jumpstart your business.

Read on to learn the basics of Chapter 11 bankruptcy.

Understand the Types of Bankruptcy

When it comes to types of bankruptcy, there are others beyond Chapter 11. Chapter 7 and 13 are two of the other common forms of bankruptcy. And Chapter 12 helps out struggling farmers, while Chapter 15 applies to international bankruptcy.

Under Chapter 7 bankruptcy, a person or business has everything they own liquidated under the guidance of the court. Generally, this happens because someone doesn’t make enough money to cover debts. All of the money from the sale of assets goes toward paying creditors. Sometimes the best offer will be from the former directors or owners to buy back part or all of the business to retain the companies legacy. See What is Phoenix Company and learn how it can help maintain the company after liquidation.

In the end, credit card debt and other unsecured debts are removed. Chapter 7 may ward off home foreclosure and allow someone to keep critical assets, such as a retirement account. An individual will need court approval to file for this type of bankruptcy.

With Chapter 13, someone won’t need to liquidate assets. They will need to commit to a new repayment plan for debts, however. And while anyone can file for Chapter 13, the downside is that it remains on their credit report for 7 years.

What Is Chapter 11 Bankruptcy?

Chapter 11 presents an opportunity for a business or individual to restructure their financial debts. This means that a company or person won’t need to worry about creditors coming after them. The Chapter 11 designation provides protection.

The business will need to demonstrate that they can keep their business churning while making a plan to pay down debts. This may mean reducing interest amounts or extending due dates for payments. Both the creditors and court will need to give this plan their seal of approval.

When a company is trying to regain traction during Chapter 11, it may need financial help. DIP financing may provide that solution. This loan can help a company manage payroll and other financial obligations.

It also can keep operations functioning smoothly during Chapter 11. And ultimately, this kind of financing translates to minimal disruption to business as usual.

Chapter 11 Cases Don’t Need to Take Forever

How does Chapter 11 bankruptcy work? The Chapter 11 bankruptcy process can take less than a day or drag on for months. And in some cases, the process may last years.

With a realistic and equitable plan, the process should move more quickly. The first step is to draft a bankruptcy petition with the help of a qualified attorney.

A business also will need to disclose its assets and business situation — as well as a reorganization plan. In prepackaged cases, a company can negotiate with creditors, agree to a plan, and avoid a formal filing.

For small businesses, the Small Business Reorganization Act (SBRA) may provide a more expedited process. Small businesses with lower debts can avoid lengthy processing times and gain more latitude with creditors. Assuming the small business is operating and does not have a creditor’s committee, the SBRA path may be an option.

You May Remain Profitable in Chapter 11

One of the benefits of filing Chapter 11 bankruptcy is that your business may remain open. In other words, you can still turn a profit. The outcome of the filing means that different people will be in charge, however.

Traditional stakeholders will not be calling the shots. Instead, bondholders and creditors will be at the helm of a business filing Chapter 11 bankruptcy. After all, they are the entities with the most at stake when a company needs to pay off debts.

Business should continue normally for a company. Unless the bankruptcy filing has been publicized, many shoppers or clients will not even know that it’s happening. Suppliers connected to the business will receive notifications in the mail, though.

Even though bankruptcy for businesses carries a stigma, it shouldn’t. Filing for bankruptcy doesn’t mean that a business is doomed for failure.

Many vendors choose to remain in connection with a business that has filed for Chapter 11. And many businesses will have enough money or financing to remain viable — and profitable — during bankruptcy.

How Chapter 11 Impacts Employees

When a company files Chapter 11 bankruptcy, employees may wonder if they have job security going forward. The answer to this question depends on the company’s financial status. In some instances, the time to renegotiate with creditors is enough for a company to rebound and resume profitability.

In other instances, the Chapter 11 bankruptcy process may come with some stipulations from the creditors. Since wages and health coverage can drive up expenses, a company may need to pare down its workforce to move forward.

As an employee, you can trust that a bankrupt employer won’t be able to take your 401(k) retirement funds. You may want to adjust your investment strategy, though, if you have holdings in your company’s stock. And if you’ve earned benefits through a pension, they should be protected.

If layoffs are in the future, a company is required to notify its employees. This is part of the Worker Adjustments and Retraining Notification (WARN) Act. Additionally, a company that has filed Chapter 11 will need to honor its commitment to pay you wages.

Know if Filing Chapter 11 Bankruptcy Is Right For You

What is Chapter 11 bankruptcy? It’s a form of protection that can help a person or company navigate a difficult financial time. If you consider the impact on employees and abide by court orders, you can work toward a better financial future.

For more information to keep your business and personal life in order, check back for new articles.