You've probably heard of the famous "Chapter 11" or Chapter 11 Bankruptcy Code, which is designed to allow businesses experiencing financial difficulties to protect themselves from creditors, restructure their financial commitments, and in some cases even obtain financing to keep the business afloat.
What questions should you ask yourself before considering a bankruptcy protection program?
Is the business making money? Is the delay you are facing in payments due to a specific situation?
Do the assets of the business exceed the debts of the business? Is it a business with sufficient assets to reorganize?
Is the business owners personally liable for the debts of the business? In this case, it may be more appropriate to seek protection for the business or the owners, with a view to negotiating with creditors.
Even though Chapter 11 is the most talked about, it is important to understand that the Bankruptcy Code offers different protections and you should consider the size of your business, as well as the state it is in. If your business will be liquidated, the best protection for you will probably be Chapter 7, while if you require a reorganization to keep the business running, you may be able to avail yourself of the benefits of Chapter 11 or 13.
It should be noted that Chapter 13 applies only to individuals or sole proprietorships, but small businesses can benefit from this protection if their owner requests it, as it will allow them to free up cash, which is one of the reasons why small business owners choose to opt for Chapter 13 instead of Chapter 11.
In analyzing these options, we recommend that you study Chapter 11 Subchapter V, which is a more expeditious and economical version of the restructuring process offered in Chapter 11. To apply for this program you must meet two requirements: (i) The business must be in operation; (ii) the amount of debt as of the date of filing the application must not exceed USD $3,024,725.
We point out the common benefits of Chapters 11 and 13, which refer to debt restructuring.
What kind of advantages do these protection programs offer?
The main and most interesting is that they allow the business to continue operating, with protection from any type of measures, seizures, or executions.
The debtor retains its ownership rights over the assets necessary to operate the business, as well as time to sell those assets that are not necessary or are too burdensome for the business.
They allow the debtor to modify the payment terms of secured debts (e.g. those secured by a mortgage or equipment rental).
In case you want to sell the business, you can organize all the obligations and establish sufficient protection to sell it to a third party at a better price and ready to operate.
In particular, Chapter 11 has a specific advantage, through the figure of the "debtor in possession", which is unique and allows the debtor to obtain financing that allows it to fund its operations during the process of applying for and complying with the protection provided by Chapter 11.
Also, there is no specific time limit on the duration of Chapter 11 protection. Unlike Chapter 13, which establishes a 5-year time limit for completing the repayment plan, the provisions of Chapter 11 indicate that the plan will take as long as necessary to complete.
Once the advantages have been analyzed, we must also consider the main disadvantages of this type of program.
The first disadvantage is the cost of this type of process, depending on the magnitude of the reorganization and the type of company, it is necessary to have legal assistance, pay lawyers and, depending on the case, administrators for the supervision and execution of the process.
The second is the time it takes for this type of process to establish protection and organize debts. The estimated minimum time is between 4 and 6 months for the courts to approve a reorganization plan, which is detrimental to the company while waiting for the decision. Additionally, the company's directors lose control of business decisions, such as the sale of assets, agreement with a creditor, obtaining credit or even hiring a professional for the company.The second is the time it takes for this type of process to establish protection and organize debts. The estimated minimum time is between 4 and 6 months for the courts to approve a reorganization plan, which is detrimental to the company while waiting for the decision. Additionally, the company's directors lose control of business decisions, such as the sale of assets, agreement with a creditor, obtaining credit or even hiring a professional for the company.
In conclusion, reorganization is not easy for a company to undertake. In many occasions what starts with a restructuring under Chapter 11 or 13, ends in the total liquidation of the assets or sale of the company.
If your business presents some financial difficulties and you need support analyzing the different options, you can contact us and we will gladly assist you.