Significant Assets and/or Debts? Why Chapter 11 Bankruptcy May Be Best
Most business owners and entrepreneurs have two primary options when it comes to filing for bankruptcy: They can file under Chapter 7, or they can file under Chapter 11. But choosing between Chapter 7 and Chapter 11 is not simply a matter of picking one and moving forward. Each option offers different benefits and drawbacks under different circumstances, and the option you choose could have a significant impact on your finances and business opportunities in the future.
When deciding whether to file under Chapter 7 or Chapter 11, the total value of your business assets and debts is a key factor. If you have significant assets and/or debts, then a Chapter 11 bankruptcy may be best. Here’s why:
Having Significant Assets Can Favor a Chapter 11 Bankruptcy
Having significant assets can weigh in favor of a Chapter 11 bankruptcy filing for several reasons. First, and most simply, having significant assets could make you ineligible to file under Chapter 7. To file under Chapter 7, your means must be inadequate to satisfy your financial obligations as they come due. If you fail the “means test,” then you aren’t eligible to have your debts discharged in a Chapter 7 bankruptcy. Notably, however, the means test does not apply to debtors who have primarily business debts.
Regardless of whether you can pass the Chapter 7 means test (and regardless of whether it applies to your situation), having significant assets can favor a Chapter 11 bankruptcy for other reasons as well. In Chapter 11 bankruptcy proceedings, business debtors reorganize their debts as opposed to having them discharged. This means that business owners and entrepreneurs can keep their companies afloat with new payment plans that allow them to satisfy their obligations to their creditors over time.
Of course, even being able to make reduced monthly payments requires adequate working capital and the ability to generate revenue. This means that Chapter 11 bankruptcy debtors need to have sufficient business assets to operate as a going concern. It is a common misconception that you need to be down to your last dollar to file for bankruptcy—this is emphatically not the case. The Chapter 11 bankruptcy process is designed to allow business owners to reorganize their companies’ debts while remaining in operation, and this necessarily requires business owners to have significant assets in their possession.
Having Significant Debts Can Also Favor a Chapter 11 Bankruptcy
Having significant debts can weigh in favor of a Chapter 11 bankruptcy as well. Most immediately, filing for Chapter 11 bankruptcy triggers an “automatic stay.” This is a legal mechanism that prevents creditors from pursuing collection while a business debtor’s bankruptcy case is pending. So, if you have significant business debts that you cannot afford to pay as they come due, then filing for bankruptcy under Chapter 11 can provide immediate short-term relief while you work through the initial stages of the bankruptcy process. This automatic stay also provides the opportunity to renegotiate directly without the threat of default looming overhead.
Reorganizing business debts in a Chapter 11 bankruptcy is a complicated process; and, while there are rules and restrictions that apply, business debtors also have significant opportunities to structure creative solutions that minimize both their ongoing payment obligations and their total outstanding liability. In this regard, the more debts a business has—and the more risk individual creditors face—the more creative opportunities the business may have available.
Another key benefit of filing for bankruptcy under Chapter 11 as opposed to filing under Chapter 7 is that, except in cases involving fraud or gross mismanagement, the business owner remains in control. Rather than having a trustee appointed to manage the company’s affairs, the business owner continues to operate the business as a “debtor in possession,” and the business owner can continue to use the company’s assets, equity and debt financing to work toward sustainable profitability.
Additional Considerations for Pursuing a Chapter 11 Business Bankruptcy
While these benefits of filing under Chapter 11 merit careful consideration when evaluating your options as the owner of a struggling business, there are some important additional considerations as well. For example, before moving forward with a Chapter 11 bankruptcy filing, it is important to keep in mind that:
- If your company has limited revenue, a Chapter 7 filing could still make sense. Even if your company has significant assets, if the value of these assets is significantly exceeded by the value of your company’s debts, then a Chapter 7 filing could still be your best option. This is especially true if your company would continue to struggle even with a heavily reorganized debt structure due to limited revenue.
- While you can stay in control of your business, certain transactions will be subject to court approval. Even though you can continue to run your business during Chapter 11 bankruptcy proceedings, you will need to seek judicial approval before engaging in many types of transactions. This includes (but is not limited to) selling business assets; leasing or financing real estate, vehicles or equipment; renegotiating contracts with vendors and other third parties; and, making significant changes to your company’s operations.
- Filing for bankruptcy will impact your company’s financial reputation and standing. Whether you file under Chapter 7 or Chapter 11, filing for bankruptcy will make it more difficult to secure debt financing and enter into other credit-based commercial relationships in the future. As a result, before committing to a bankruptcy filing, it is important to thoroughly consider any non-bankruptcy alternatives you may have available.
Speak with a Business Bankruptcy Lawyer about Filing Under Chapter 11
Do you have questions about filing for a business bankruptcy under Chapter 11? If so, we can help, and we encourage you to contact us for a complimentary initial consultation. To speak with a business bankruptcy lawyer at our Miami or Fort Lauderdale law offices in confidence, give us a call at 305-768-9909 or tell us how we can reach you online today.