Chapter 11 Bankruptcy

When a business is faced with extreme financial difficulty, either due to cash flow problems, management problems or other problems, filing for a Chapter 11 protection may be considered to save the business. Chapter 11 allows a debtor to remain in possession unless a request is made for appointment of a trustee. A debtor-in-possession has the rights and powers, and is required to perform the functions and duties of a trustee. This includes the power to operate the debtor's business without the necessities of obtaining a court order.

The first objective is an analysis of the economic situation confronting the debtor. Most cases can be fitted into the following categories:

(a) Debtors With Cash Flow Problems But Businesses are Still Profitable.

Some businesses are profitable but have problems paying bills on a current basis. This may due to inadequate capitalization, aged or bad account receivable, and/or interest and principal payments on existing debts being too high. As the situation worsens and bills become delinquent, trade or other creditors may withdraw credit and/or place the debtor on cash or C.O.D. basis. Some creditors may start to sue for past due balances. Secured creditors may commence foreclosure proceedings. In such event, chapter 11may be an option. Chapter 11 filing will stop all debt collection activities for some time until a plan is devised. 

(b) Debtors with Unprofitable Businesses Which Have Management problems.

Some businesses are operating at a loss, but could be operated profitably if managed correctly. If debtor-in-possession can solve the management problem or if the business can be reorganized, chapter 11 may be an ideal way to stop creditors' collection efforts while the necessary business plan is formulated and carried out.

(c) Debtors with Special Problems.

Some debtors have special problems such as a desire to cancel or modify contracts, leases; or try to reinstate mortgage after default; or try to resolve multiparty litigation, etc. Chapter 11 may also be considered to solve these problems.

The filing of a petition under chapter 11 operates as a stay applicable to all actions by the creditors. This stay gives the debtor time to make operating decisions and to formulate a reorganization plan .

Chapter 11 is a time consuming and complicated process. There are other alternatives to this process, such as negotiating with creditors before filing the chapter or defending creditors' action in the court of law. For further information or advise specific to your situation, please contact us.