A Chapter 11 bankruptcy reorganization plan gives the filer the chance to restructure and renegotiate the terms of paying back creditors. The difference between Chapter 11 and the other Chapters lies within the debtor’s obligations and how the filer’s plan gets confirmed under the Bankruptcy Code.
Chapter 11 is often thought of as corporate bankruptcy. This is because most cases are filed by corporations and large business owners. In rare cases, individuals may be required to file Chapter 11 if they have too much debt and don’t qualify under other chapters of bankruptcy.
Chapter 11 may not be the best solution for small business owners. Higher fees are often required and it usually is costlier and more burdensome than other chapters of bankruptcy. Also, individuals have more obligations compared to Chapter 7 or Chapter 13.
An experienced Business Bankruptcy Attorney will help you choose the best Chapter for your filing and maximize the chances of a successful filing.
Individuals who file Chapter 11 are given one of the strongest protections that individuals can get: the automatic stay.
The automatic stay immediately stops debt collectors and creditors from calling or harassing filers for unpaid credit cards and other unsecured creditors. It also stops foreclosure and eviction proceedings from moving forward. Further, the IRS cannot assess or collect discharged pre-petition corporate income tax liabilities beyond what the court or plan determines.
Importantly, the automatic stay is initiated as soon as the filer submits their bankruptcy petition to the court.
A Chapter 11 Bankruptcy Attorney will help you make the most of the Chapter 11 bankruptcy protection.
Chapter 11 bankruptcy filing in New York City starts with the filing of a bankruptcy in either the Southern District or Eastern District of New York federal bankruptcy courts, depending on the borough in which the business is located. The bankruptcy forms list all of the filer’s debts, assets, and financial information. Filers will also have to attend a court hearing where they will be questioned about their bankruptcy forms. Having a lawyer help you throughout the process will drastically increase the chances of a successful filing.
Public companies often prefer to file under Chapter 11 bankruptcy because it allows the company to continue operating and provides an opportunity for a turnaround. The filer usually remains in charge as a debtor-in-possession and continues to run the business while the court restructures the business debt.
Unlike other chapters of bankruptcy, in Chapter 11 cases a trustee is not automatically appointed. However, if the bankruptcy court suspects any fraud or incompetence, it will appoint a trustee to take control over the filer’s financial affairs.
The stock of a company that has filed for Chapter 11 bankruptcy will most likely continue trading. Even if the company gets delisted from the Nasdaq or NYSE, as may happen if it fails to meet listing requirements, it may continue to trade on the Pink Sheets or OTCBB.
However the success rate for holders of Chapter 11 bankruptcy Stock Options is not good. Stockholders will not receive dividends during a bankruptcy proceeding and are at the bottom of the list to get paid off, as bondholders and creditors come ahead of them.
If a company is determined by the court to be insolvent, stockholders may not get anything after bankruptcy. Even if it survives, common stock usually becomes diluted during bankruptcy. Also, the company may issue new shares upon emerging from bankruptcy, at which point the old shares may be canceled. If that happens, the stock may become worthless or stockholders may be able to exchange old shares for new shares in the reorganized company. These new shares, however, are usually fewer in number and lower in value.
Subchapter V, or Subchapter 5, makes it easier and cheaper for a business to file for Chapter 11 by modifying or eliminating many traditional Chapter 11 requirements. This makes it easier for small businesses to confirm plans of reorganization and owners to retain their equity and control.
In response to the COVID-19 crisis, the US Congress approved in 2020 the CARES Act. This expands Subchapter V eligibility for a period of one year (or longer if extended by Congress) by allowing companies with up to $7,500,000 (up from $2,725,625) in secured and unsecured non-contingent and liquidated debt to use Subchapter V to reorganize. This increase makes it possible for larger companies to qualify as a “small business debtor” and seek confirmation under the relaxed standards of Subchapter V.
To be eligible for Subchapter V, a debtor must both elect to be a Subchapter V debtor and meet the definition of a “small business debtor.” This usually means someone with $7,500,000 or less in debts, 50% or more of which are from commercial or business activities.
Our legal team here at Roemerman will help you make the most of the bankruptcy tools available to you.
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