In a roller-coaster economy, a struggling company might decide to seek a fresh start under Chapter 11 bankruptcy proceedings — especially if its leadership believes the business could eventually become profitable through debt relief.
Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It differs from Chapter 7, which involves liquidating or selling off the assets of a business that’s closing its doors. Debts aren’t simply absolved by filing Chapter 11 — though they’re likely to be reduced or paid off over a period of years.
Instead, Chapter 11 allows the business to continue day-to-day operations, as it undergoes downsizing and liquidation. The goal of a Chapter 11 filing is to implement a more sustainable solution to pay off debts and reorganize the business so it may survive this process.
What to expect
There are five major steps involved in the Chapter 11 process:
Step 1. Once the appropriate forms are filed in court, the company is provided immediate relief — called an automatic stay — from creditors. A bankruptcy filing doesn’t always affect business operations, but it will likely influence the stock price of a public company and the borrowing costs for any business. The company continues to pay employees and provide benefits. It’s also able to keep dealing with suppliers and customers so that it may continue earning money.
Step 2. The bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they’re owed money by the company.
Step 3. The business proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the business proceeds in good faith, the period may be extended.
Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any disputed claims. And once the total value is determined, the business can establish whether its reorganization plan is viable. Sometimes, litigation over the priority or handling of creditors arises.
Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a reorganization plan and the company distributes payments according to the plan.
Restoring your rep
Even though a business can overcome a Chapter 11 filing and thrive over time, its reputation with customers, suppliers and employees may take a hit. If your company is thinking about filing Chapter 11, be sure to clearly understand what’s involved and the potential impact on critical business relationships. Be sure to consult with your attorney and CPA to help ensure bankruptcy is the right move for a better future.