Filing Chapter 11 can be a viable option for many troubled businesses. Thinking about the Chapter 11 process as a three-act play can help shed light on what to expect before making the decision to file.
Act 1: “I think we have a problem!”
The painful reality of this economy is that good businesses have turned bad; particularly small businesses in the $3 million to $10 million range of annual sales. These enterprises are typically family-owned or closely held. The common thread is reduced sales revenue against a rising tide of expense and regulation. Denial creeps into management’s mind set as red flags start to appear; credit lines become exhausted, accounts payable aging extends beyond reasonable terms, taxes get deferred, and cuts are indiscriminately made. Recognizing the problem is the first step in a process that may lead to relief through the very powerful provisions of Chapter 11 of the Bankruptcy Code.
Act 2: “Maybe we should file!”
Chapter 11 is otherwise known as “Reorganization.” In most instances, management of the business stays in control of the reorganization process and the entity becomes known as a “Debtor in Possession.” There is no Trustee. The operations of the Debtor in Possession are closely scrutinized by the Office of the United States Trustee, the Court and a creditor’s committee, if one is appointed. If the cooperation of bank lenders and taxing authorities suddenly disappears or if creditors seeking collection become disruptive of the business, then filing should be seriously considered. There are certain advantages which are only available through the reorganization process, not the least of which is the automatic stay, which prohibits almost all creditors from collecting, suing, executing, foreclosing or levying in any way without first obtaining permission from the Bankruptcy Court. There are a number of other factors to consider before filing, such as the impact it will have on customers, trusted employees, and reputation. The business community has become much more familiar with the process, however; and if relationships have been long-standing and a consensus can be built that is supportive of management’s reorganization plan, then the relief which becomes available can play a very important role in a successful restructuring.
Act 3: “What Plan?”
It’s all about the Plan of Reorganization. Very little thought need be given to it until business operations have been stabilized. Courts recognize the disruption caused by filing and allow a reasonable period of time for the Debtor to operate without the pressures that prompted the filing in the first place. No payments can be made to pre-petition unsecured creditors, so there should be an accumulation of cash. This build up becomes the currency which allows for the formulation of a plan that must meet certain standards of reasonableness and feasibility. A plan can be used to liquidate the assets of the business as a going concern or, alternatively, management may decide to remain in business by restructuring debt. This includes secured debt. The dividend to unsecured creditors is generally small; falling within the range of 5 to 20 cents on the dollar and paid over time.
A confirmed plan of reorganization becomes a contract between the Debtor and its creditors. A confirmed plan terminates the proceeding and returns all assets to the Debtor. With the assistance of accountants, brokers and skilled insolvency professionals, the process can be one of reinvention, allowing for the development of new marketing ideas and business continuity.
PDF 
About Douglas M. Neistat