What Is The First Step In Filing For Chapter 11 Business Bankruptcy?

Chapter 11 bankruptcy filings are on the rise right now. It was up more than 26% year-over-year, last year compared with 2019. The reason for the rise is because of the economic hard times we’re facing, combined with the COVID-19 pandemic conditions.  

It makes sense that Chapter 11 bankruptcy is so popular right now, because businesses are faced with significant shortfalls in revenues. The economic downturn is inspiring them to reorganize their debts and hope that they’ll be able to survive and thrive long enough to come out the other end, as a healthier and stronger business.  

What Is Chapter 11 Bankruptcy? 

Chapter 11 bankruptcy allows business entities to restructure your finances and business operations, with all the debts associated with those businesses. While the Bankruptcy Court is charged with making major decisions, you can do business as usual otherwise.  

Who Can File for Bankruptcy? 

Any partnerships, sole proprietorships, LLCs, or business entities can file for Chapter 11 bankruptcy. It could be a larger corporation or a small business. When you file the petition for Chapter 11 bankruptcy, the judge takes into consideration the input from creditors and then confirms the plan if it satisfies the legal requirements.  

Have You Explored All Your Options Before Chapter 11 Bankruptcy?  

Chapter 11 bankruptcy is not the first or best solution to save your business. It’s just one way to survive when you’ve explored other options with little or no success. Here are some options that you could/should explore.  

  • Reach out to your creditors to find fair solutions that will get you through a rough spot while helping them to mitigate the risk. They may settle your debt for a lower amount, which would stabilize your financial situation and leave you better off in the long run. The alternative in many cases is bankruptcy, which leaves you with poor credit and forces you to contend with few options as you rebuild your business.  
  • Work with a debt counselor or legal expert. It may be that you have not considered all your options, and a debt counselor can help you develop a plan to satisfy your creditors without going bankrupt.  
  • Consolidate your debt under a single loan, so you can pay down one loan with a manageable interest rate instead of multiple debtors. Your creditors would prefer that you pay your debt, and it’s ultimately to your benefit if you can find another way to avoid Chapter 11 bankruptcy.  
  • Prepare yourself for financial hardship. If you know that your financial situation will take a serious downturn, decrease your spending, and work on ways to scrimp and save. If you have a buffer, you may be able to keep up with ongoing financial responsibilities more easily without going bankrupt.  
  • Protect yourself with insurance. Before those catastrophic situations, you can give yourself an insurance safety net to help you weather whatever happens in the future. If 2020 pandemic conditions taught us anything, it’s that the unexpected surprises (without a safety net) are the ones that really hurt a business and ultimately lead to loss and failure.  

Why Would a Business File for Chapter 11 Bankruptcy?  

If your business is experiencing extreme difficulties, a Chapter 11 bankruptcy filing can give you a reprieve or stay. Your creditors are not able to pursue further action to collect on the debts that you’ve incurred. While the filling protects you, there are still restrictions on spending, hiring an attorney, and required insurance.  

How Does Chapter 11 Bankruptcy Work? 

Chapter 11 bankruptcy is also called “reorganization” bankruptcy, because it involves a plan for reorganization, which details how you plan to pay back your creditors and other obligations. The creditors have input on the reorganization plan, and they can even vote on the plan. It typically includes a number of variables.  

  • Assets and liabilities 
  • Current income and expenditures 
  • Executory contracts and unexpired leases 
  • Financial affairs 

When you’ve submitted all the paperwork, you’re protected from your creditors. As part of the process, you must participate in a credit counseling program within 180 days of filing for bankruptcy.  

How Long Does Chapter 11 Bankruptcy Take? 

Chapter 11 bankruptcy could take a few months if all went well, but in most cases, it takes much longer. The whole process can take years if there is litigation involved in your bankruptcy case. The length and complexities involved in the Chapter 11 bankruptcy process are part of the reason it’s also so expensive.  

What Does Chapter 11 Bankruptcy Cost? 

Chapter 11 bankruptcy costs ~ $1,167 plus $550 in administrative costs and fees to the US trustee. Beyond those fees, you’ll also need to pay the fees to your bankruptcy attorney, which can vary depending on who you hire and the complexity of your situation. It costs more than Chapter 7 and Chapter 13 bankruptcy options, but it’s usually the only option that is available as protection against collections.  

What is The First Step in Filing for Bankruptcy? 

When you decide to move forward with your Chapter 11 bankruptcy, the next step is to file a petition with the Bankruptcy Court in your state. The petition includes all your property and debts, as well as liabilities and assets.  

Given the complexity involved in filing Chapter 11 bankruptcy, we recommend exploring your options for Chapter 11 business bankruptcy attorneys. With a bankruptcy situation, what you don’t know really can negatively impact your future. So, it’s best to find an attorney who has your best interests at heart.