The “Five Ws” of Chapter 11 Reorganization Plans
While some business owners and executives are well-versed in the intricacies of the Chapter 11 bankruptcy process, for those who haven’t been through the process before, learning what to expect is the first step. Unlike Chapter 7 bankruptcy proceedings (which involve liquidating a business’s assets), Chapter 11 proceedings involve restructuring the business’s debts so that it remains viable as a going concern. Working with an experienced Miami Chapter 11 bankruptcy lawyer is essential, as there are numerous critical decisions that need to be made at each step along the way.
Restructuring a business’s debts under Chapter 11 involves developing a “reorganization plan.” A reorganization plan specifies how the business will pay its debts going forward and will generally be structured to bring the business current on its liabilities within three to five years. But, there are numerous intricacies and permutations, and with an informed and proactive approach, businesses can structure their reorganization plans to ensure that they have the best possible chance of making their payments and resolving their outstanding debts in the future.
What Business Owners Need to Know About Reorganizing Their Companies’ Debts Under Chapter 11
While we routinely discuss the more intricate aspects of business bankruptcies on our blog, this week we’re going back to the basics. For the uninitiated, here are the “five Ws” of developing a reorganization plan under Chapter 11:
Who?
A reorganization plan is essentially a court-approved agreement for how a business (referred to as the “debtor”) will satisfy its outstanding liabilities to its creditors going forward. In a traditional Chapter 11 case, the debtor and its creditors (or a creditors’ committee) will negotiate the terms of the debtor’s reorganization plan before submitting it for the court’s approval. If they are unable to agree on the terms of the debtor’s reorganization plan, then they will need to pursue litigation or alternative dispute resolution (ADR) in order to move forward.
In some cases, however, the debtor can propose a reorganization plan without its creditors’ involvement. This can be done through a “cramdown” bankruptcy or by pursuing a “small business bankruptcy” under Subchapter V.
What?
A reorganization plan outlines how a debtor will pay back its creditors over time. The obligation to satisfy the debtor’s outstanding financial obligations is what distinguishes a Chapter 11 bankruptcy from a “liquidation” bankruptcy under Chapter 7.
But, the “reorganization” aspect of a reorganization plan means that the debtor won’t be held to its current monthly payment obligations. Instead, the plan consolidates the debtor’s obligations in order to achieve the parallel goals of satisfying the debtor’s creditors and allowing the debtor to continue operating. With this in mind, a typical reorganization plan will address considerations such as:
- Identifying classes of creditors and their respective rights
- Specifying how in each class will be paid going forward
- Making clear when creditors’ claims will be considered satisfied
- Selling debtor assets and assuming or rejecting executory contracts
- Changing payment terms and making other amendments if necessary
These are just broad examples. Reorganization plans can range from relatively straightforward to highly structured and sophisticated, and debtors can—and should—work with their counsel to develop a custom-tailored plan that protects their interests going forward as much as possible.
When?
There are several business, financial and legal considerations involved in deciding when a business should pursue reorganization under Chapter 11. Ultimately, there is no single “right” answer. Instead, owners and executives of financially distressed companies must work with their company’s counsel to thoroughly assess their options and make an informed decision about how best to proceed under the circumstances at hand.
Broadly speaking, however, pursuing reorganization under Chapter 11 is an option when a business is presently unable to meet its recurring financial obligations but has a path toward achieving financial stability in the future. If your business needs some financial breathing room in order to work toward becoming profitable, then reorganizing under Chapter 11 could be a viable solution.
Where?
Reorganizing a company’s debts through the Chapter 11 process involves filing a petition in U.S. Bankruptcy Court. The U.S. Bankruptcy Court for the Southern District of Florida has locations in Miami, Fort Lauderdale and West Palm Beach.
Why?
While there are a variety of specific reasons why business owners or executives may choose to pursue reorganization under Chapter 11, the overarching purpose of establishing a reorganization plan through the bankruptcy process is to keep the business afloat. This contrasts with pursuing a liquidation bankruptcy under Chapter 7, which typically ends with winding up the business’s affairs.
How Do You Reorganize a Company’s Debts Under Chapter 11?
If you are interested in reorganizing your company’s debts through a Chapter 11 bankruptcy, how do you move forward?
While filing a petition in the U.S. Bankruptcy Court is the first formal step in the process, there are several preliminary steps that debtors need to take to prepare. These include (but are by no means limited to):
- Gathering the documents that will be needed to prepare the company’s bankruptcy filing
- Deciding which type of Chapter 11 bankruptcy case to pursue (i.e., a traditional Chapter 11 case or a small business bankruptcy under Subchapter V)
- Preparing the bankruptcy petition and all necessary schedules
- Developing a proposed reorganization plan
- Anticipating potential issues that may arise during the bankruptcy process
By taking these steps (among others), business owners and executives can feel confident that they are making informed decisions with their company’s long-term best interests in mind. Engaging experienced counsel to assist with evaluating the company’s options and pursuing a strategic path forward is a critical step as well.
Request a Free Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman
At Edelboim Lieberman, we help businesses of all sizes navigate the Chapter 11 bankruptcy process in South Florida. If you would like to speak with a Miami Chapter 11 bankruptcy lawyer at our firm, we invite you to get in touch. Give us a call at 305-768-9909 or tell us how we can get in touch online to schedule a free consultation today.
