Running a successful business in today's world can be a daunting challenge. It takes knowledge, good connections, a solid reputation and even a bit of luck. Unfortunately, not everyone can achieve these type of results, which is why for many small businesses in financial distress wishing to continue operating, the only alternative can be to go through some type of bankruptcy.
With Detroit's recent and very public record-breaking municipal bankruptcy filing, a lot of people are wondering what types of bankruptcies may be applicable to them if they have a financially distressed corporation, partnership or limited liability company. This article will explore the intricacies of a Chapter 11 bankruptcy.
Although Detroit is entering a Chapter 9 bankruptcy, Chapter 11 bankruptcies are usually the ones that are attracting all of the attention when they happen. Back during the financial crisis in 2008 and 2009, several very large corporations fell victim to the downturn in the economy and needed to enter Chapter 11 bankruptcy. Chrysler saw sales decline in 2008 and filed on April 30, 2009 with nearly $40 billion in assets. GM, like Chrysler, had to go through a bankruptcy on June 1, 2009 with $91 billion in assets. The fourth largest investment bank in the United States, Lehman Brothers, fell on Sept. 15, 2008 with $691 billion in assets.
Chapter 11 bankruptcies need to be filed in bankruptcy court and are usually voluntary in nature. Sometimes, creditors will force a defaulting debtor into an involuntary Chapter 11 if they believe that it is in their best interest. As was mentioned previously, mostly corporations, partnerships and limited liability companies enter Chapter 11. Individuals that do not have too much debt or income usually file under Chapter 7 or 13 in order to save time and money. Chapter 11 bankruptcies can take from six months to two years before they conclude.
After a company has filed for bankruptcy, then the court makes all major decisions for the company from that point forward. The court is now in charge of most of the company's operations and must grant any sales of the company's assets, cancelling of any leases, terminating or increasing business endeavors, signing of contracts and the payment of any lawyers or other business professionals. Creditors may be for or against any of the court's actions and if necessary, may provide insight to the court on how it should proceed with certain items. Unsecured creditors must form a committee that may grant them similar input with the court.
Typically, a debtor has four months after filing in order to propose a business restructuring plan. If the court decides that the company's reorganization plan has merit, it may extend the debtor's timeline to file Chapter 11 for an additional 18 months. Usually, most restructuring plans entail downsizing the business in order to minimize expenses and begin to satisfy the company debts, although sometimes a complete termination of operations and a sale of company's assets is the only course of action. Under the restructuring plan, the company must prove that the plan is feasible, has been proposed in good faith, be in the best interest of the creditors and be fair and equitable.
All situations are different for each company, but the ultimate goal for a company wishing to stay in business is to have most, if not all, of the company's creditors financially satisfied while at the same time continuing their business operations. Sometimes companies succeed and come out of Chapter 11 bankruptcy with a 'slimmed-down' version of itself and sometimes meeting the 'best interests' of the creditors forces them to shut down completely. Studies show that only about 10 to 15 percent of Chapter 11 situations result in a successful restructuring.
To learn more about the Chapter 11 restructuring process, contact a qualified a corporate bankruptcy law attorney.
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