If your small business is in financial distress and cannot repay a growing amount of debt, filing for bankruptcy is a drastic yet a viable option. To keep your business afloat, restructuring your debt(s) under Chapter 11 or Chapter 13 might be what you need to stay in business. Before filing for bankruptcy, it is important that you hire a competent attorney from San Diego Bankruptcy Attorney.
Both Chapter 11 and 13 allow small business owners to suggest a plan to structure their finances, which can, in turn, help them stay in business. If you qualify for either Chapter 11 or 13, the plan can:
- Let you keep property needed to run your small business,
- Give you sufficient time to sell assets you cannot afford to keep or you do not need,
- Adjust payment terms on secured debts (such as equipment loans or real property mortgages),
- Eliminate (discharge) debts that you cannot afford to pay over the plan term (in chapter 11 only).
What is Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy is the only bankruptcy option for small businesses that want to restructure their finances but have too much debt to be eligible for Chapter 13 bankruptcy. This bankruptcy option is generally applicable to commercial businesses that wish to continue with their business operations while repaying their debts by acting upon a court-approved restructuring plan.
The filing of a petition can be either voluntary or involuntary. You will be given a time frame of about 4 months to come up with a reasonable reorganization plan. Nevertheless, the time frame can be lengthened up to eighteen months if there is a justifiable reason to do so. The responsibility to make timeframe approvals falls on the trustee’s shoulder.
Who is Eligible for Chapter 11 Bankruptcy?
Almost anyone can file for bankruptcy under Chapter 11. This includes:
- Sole proprietors
- Joint ventures
- Limited liability companies
Majority of bankruptcy Chapter 11 cases are filed by limited liability companies, partnerships, and corporations. While individuals can file bankruptcy under Chapter 11, they can do so if they have too much debt or income to be eligible for Chapters 13 and 7.
Therefore, you are eligible for Chapter 11 bankruptcy if you are an individual or business entity that is engaged in business or other commercial activities. You are also eligible if you meet current debt limitations, save for obligations owed to insiders such as your relatives.
How to File Bankruptcy under Chapter 11
The process of filing bankruptcy under Chapter 11 starts with filing a petition in a bankruptcy court. Most debtors file bankruptcy under Chapter 11 where their primary business is situated. They can also file bankruptcy where their businesses are domiciled, i.e. incorporated.
In a voluntary case, it is you who will take the initiative of filing bankruptcy to seek relief. In involuntary cases, it is the creditors that come together and file an involuntary case against a defaulting debtor.
In the majority of Chapter 11 bankruptcy cases, no trustee is appointed. Instead, you continue to run your business in the normal course as the “debtor in possession”. However, the bankruptcy court can appoint a trustee to take charge of your business operations if it finds sufficient cause, including gross mismanagement of your business affairs, incompetence, dishonesty, and fraud.
Besides appointing a trustee to take control of your business affairs, the bankruptcy court also has control over various other major decisions. Among other things, the court can approve:
- Expanding or shutting down of your business operations,
- Entering into or amending licensing, union, vendor, and other agreements and contracts,
- Sale of your assets, such as real property or personal property,
- Entering into or breaking a lease of personal or real property,
- Secured financing arrangements (such as a mortgage) that allow you to borrow money after your case is filed,
- The payment of fees and expenses, and the retention of attorneys and other professionals.
When making its decision, the bankruptcy court will consider input from shareholders, creditors, and other parties in interest. Unsecured creditors can appoint a committee that can repre10sent their interests in the Chapter 11 bankruptcy case. The appointed committee can retain bankruptcy attorneys and other professionals at the debtor’s expense.
As the debtor, you will have the exclusive right for 4 months to suggest a reorganization plan after you file for bankruptcy under Chapter 11. After proving good cause, the bankruptcy court can extend your exclusivity period to file a Chapter 11 bankruptcy plan to up to 18 months after the petition date. The exclusivity period can also be shortened depending on the circumstances.
After the expiry of the exclusivity period, other parties of interest, such as the shareholders and the creditors, can suggest completing reorganization plans. If these other parties of interest will not be satisfied with your progress, they may move to dismiss the Chapter 11 bankruptcy case or convert it to a Chapter 7 bankruptcy case.
Confirmation of a Chapter 11 Reorganization Plan
A Chapter plan permits you, the debtor, to reorganize or restructure your business financial affairs. In most cases, reorganization plans offer at least some rationalization of the debtor’s operations in order to free up some assets and cut down operational costs.
In some cases, liquidating plans are suggested to provide a total shutdown of the business operations and the organized sale of its leftover assets. On rare cases, a Chapter 11 reorganization plan will grant full and immediate repayment of the total debt owed to all creditors.
The Chapter 11 reorganization plan is basically a contract between you and your creditors as to how your business will operate and repay your obligations in the future. After you come up with the reorganization plan, your creditors will be entitled to vote on whether they accept your proposed plan or not.
For your reorganization plan to be approved by the bankruptcy court, at least one class of the impaired claims must vote in favor of your plan. An impaired claim is generally a debt that will not be repaid in full upon plan confirmation or when initially due.
The approval of a proposed reorganization plan is referred to as “confirmation”. The confirmation of a proposed reorganization plan rests solely with the bankruptcy court. In order for the bankruptcy court to approve your reorganization plan, your plan must meet a number of requirements, including:
- Your reorganization plan must be feasible. This means that you have to prove to the bankruptcy court that you will be able to raise adequate revenues in the duration of the plan term to cover your expenses, including payments to your creditors.
- Your reorganization plan must be projected in good faith and not by means prohibited under applicable law.
- Your reorganization plan must be in the best interests of your creditors. This means that your plan proposes that your creditors obtain at least as much as they would if your case was switched to a Chapter 7 liquidation.
- Your reorganization plan must be fair and equitable. This means that you intend to repay secured debts over time, not less the value of their collateral. Also, you may not retain any asset on your account of your equity interests unless all debts are repaid in full, either right away, upon plan confirmation, or over time.
Note that most cases require debtors to propose a plan that promises to repay a fraction of their debts in order to show that they have their creditors’ best interests. Only a few cases require debtors to propose a plan that promises to repay all their debts in order to pass the “best interests” test. Also, the fair and equitable requirement will only apply if your creditors happen to oppose your reorganization plan.
Studies reveal that about 10-15 percent of Chapter 11 bankruptcy cases result in successful reorganizations. Majority of the cases are usually converted to Chapter 7 liquidations or dismissed, often by agreement of the parties. Conversion or dismissal of a Chapter 11 bankruptcy cases requires the approval of a bankruptcy court. The bankruptcy court can either cover or dismiss a Chapter 11 case for cause, including failure by the debtor to illustrate that it can effectively reorganize.
Advantages of Filing Chapter 11 Bankruptcy
- There are no income or debt requirements or limitations for filing Chapter 11 bankruptcy.
- Filing bankruptcy under Chapter 11 does not require you to turn over your disposable income to a trustee.
- You do not lose control over your assets during the bankruptcy.
- Your property will not be liquidated to repay your debts.
- You will continue to earn profits through your investments or business.
- The automatic stay provisionally protects you from foreclosures and lawsuits.
Disadvantages of a Filing Chapter 11 Bankruptcy
While Chapter 11 provides more flexibility to small business owners, it often takes a lot of time and too much money to be a sensible option for business owners. It is for this reason that most small business owners opt for Chapterr13 over Chapter 11.
If you are not sure whether filing bankruptcy under Chapter 11 is a smart thing to do, you need to contact a bankruptcy attorney. An experienced attorney will look at all the aspects of your case and advice you accordingly.
What is Chapter 13 Bankruptcy?
Chapter 13 is a restructuring option for small businesses that get a steady revenue and wishes to repay all their debts, even if they are presently not capable of repaying those debts. Chapter 13 addresses both secured and unsecured debts.
Filing for bankruptcy under this chapter allows you to discharge some or all of your debts by completing a 3-5 year repayment plan. Just like Chapter 11, Chapter 13 allows the debtor ownership of property
Who is Eligible for Chapter 13 Bankruptcy?
Chapter 13 is an option for sole proprietorships, i.e. small businesses that are owned and operated by individuals. Therefore, this is not an option for corporations, limited liability companies, or partnerships. Other eligibility requirements include:
- The debtor (in this case, a small business) must have sufficient disposable income, including regular wages or salaries, public gains (welfare payments), social security gains, pension payments, etc.
- The whole debt should not be extremely high,
- The debtor must be present on its income tax reporting.
Chapter 13 Repayment Plan
Similar to Chapter 11, also, Chapter 13 also allows you (the debtor) to propose a key strategy that describes how you will reimburse your creditors with time over a duration ranging from 3 to 5 years. The length of the duration will mainly depend on how much you earn. If your income is less than the median in your state, the bankruptcy may last up to 3 years. If your income is higher than similar households, the bankruptcy court can set a 5-year term.
After submitting your repayment plan, the bankruptcy court will then review it and either approve or disapprove it. If the court approves your restructuring plan, you will need to pay all your creditors via a trustee. Therefore, you will be protected against all the actions taken by your creditors (such as lawsuits and wage garnishments) for the entire plan’s life. Furthermore, after the successful completion of your plan, your outstanding debt will be discharged.
Pros of Filing under a Chapter 13 Bankruptcy
- If you are behind on your mortgage payments, you will have a chance to avoid foreclosure and keep your home,
- You will be allowed to keep your home and catch up on your late payments steadily,
- While you will be required to repay all of your priority debts, you may only pay part of your non-priority debts.
Why You Need a Bankruptcy Attorney
Various factors, from high self-confidence to financial concerns, make some people overlook legal representation when filing bankruptcy under Chapter 11 and 13. However, these people are at an increased risk of missing out on the various distinct benefits that hiring San Diego Bankrupt Attorney can offer, such as:
- Evaluate all options
Deciding whether bankruptcy is the ideal choice can be daunting, and so is selecting a suitable chapter of the U.S. Bankruptcy Code to file under. You can greatly benefit from assessing your legal rights and the various potential resolutions with a professional that has experience in bankruptcy law.
Once you hire our bankruptcy attorney, he will take into account the nature of your debt, income, property, and objectives. This will enable him to offer the best advice on the most suitable means of resolving your outstanding debt(s).
- Ensure a successful filing
Bankruptcy petitions are usually denied or dismissed due to a number of innocent mistakes, including improper filing, missing out on crucial deadlines, and missing important meetings. If you are not conversant with the bankruptcy filing process, hiring a bankruptcy can help you avoid mistakes that can lead to a denial or dismissal of your bankruptcy petition.
At San Diego Bankruptcy Attorney, we have highly competent and experienced attorneys who can handle the technical aspects of the bankruptcy filing process. With the help of our attorney, you can rest assured that costly mistakes will be easily avoided and that your bankruptcy petition will go through.
- Prevent harassment
One problem that almost all (if not all) debtors have is harassment from creditors. If you are tired of having creditors calling your home endless times issuing all kinds of threats, hiring an attorney will give you the peace of mind that you deserve. Once you hire our attorney, you can tell your creditors to call your attorney instead. Your attorney will handle the problem for you, and you will no longer have to endure the headaches.
- Evaluate possible outcomes
Filing Chapter 11 and 13 small business bankruptcy is not only a complex process, but it can also be a confusing undertaking. As their bankruptcy cases move forward, many small business owners do not usually know what to expect, and some may have misconceptions about the different aspects of their cases.
With the help of our attorney, you will know exactly what to expect. In addition, to help you know the possible outcomes of your case, our attorney will help you understand the potential risks, including the tax implications and the lingering effects on your employability and credit eligibility.
Contact Us for a Free Initial Consultation
At San Diego Bankruptcy Attorney, we offer free initial consultations, so there is no risk in setting up a meeting with one of our attorneys. Taking this crucial step can help you minimize the likelihood of making a misinformed or disadvantageous choice about your debt relief option.
Want to find out which option is best for you and learn how to eliminate the most debt and save the most money as a small business? San Diego Bankruptcy Attorney has all the answers you are looking for. Contact our San Diego Bankruptcy Attorney at 619-488-6168 to arrange a free, no-obligation consultation.