What is a Chapter 11 Bankruptcy and Why Should I Consider Filing Under this Chapter?
(Current Filing Fee $1,717)
Chapter 11 is a court-imposed protection used by businesses to protect themselves from creditor actions These can include levies on bank accounts or assets. Often the seizure of collateral prompts the Chapter 11 Filing or the threatened seizure of those assets. There may be the opportunity to reject leases for businesses that have many locations but not all the locations are profitable. For instance, when GM filed bankruptcy during the Obama Administration, it used the Bankruptcy Code to close unprofitable locations.
- Who May be a Debtor or Can File Chapter 11?
Small or large businesses may file for Chapter 11 that are in the form of partnerships, corporations. Often it involves debtors who exceed the debt limitations for Chapter 13.
- Why File Chapter 11?
Chapter 11 can offer a solution that offers great flexibility and options than the other chapters may offer. This can be used both in high and low debt cases. For instance, A Chapter 7 is a straight liquidation without any chance of saving the business. A Chapter 13 is far more rigid without the flexibility with set deadlines and rigid sets of rules for completion.
- Chapter 11 as a Valuable Option in Real Estate Cases?
Often there may be equity in the property but the owner is behind in his payment or taxes, maintenance, management fees or situations where time is needed to catch up. Chapter 11 could provide that needed element of time. Through formation of a plan these past due fees could be accounted for.
- What is a Chapter 11 Debtor in Possession?
A Chapter 11 Debtor in Possession is the process that allows the bankrupt debtor to continue to operate the business as the manager of the business. This includes all of its assets and its ongoing business operations. This gives vast powers to the Chapter 11:Trustee including but not limited to:
- Reducing the amount of payment to creditors
- Extending the time for repayment of creditors
- Objecting to claims
- Rejecting Leases
- Avoiding Liens
- Litigating and defending claims with creditors and other parties.
- Benefits/Costs Associate with Chapter 11 –
A successful Chapter 11 case, can easily reduce the debt load of companies in small cases by hundreds of thousands of dollars and in the larger cases by millions or multiples of that number easily. It can also buy time to turnaround a viable business and save the entire business.But this can be an expensive process in trying to engage in. Chapter 11 Attorneys must be paid upfront at the outset of the case for their retainer. This is supposed to last for a minimum of 4 months before any new fees can be approved. Therefore, it is common-practice for large-upfront retainers to be required. They can run from $20,000-50,000 on up depending on the size of the case and complexity of issues involved.
In it not uncommon for Chapter 11 cases to last from several months to several years. During that time, professional fees can accumulate to a rather substantial number.
In addition, there are Accountant, an fees for filing regular monthly reports with the Office of the U.S. Trustee and quarterly fees based on the disbursements of the case.
- The Plan of Reorganization
The whole point of Chapter 11 is forming and getting creditors to agree on a Plan of Reorganization which then would be confirmed by the Bankruptcy Court. Once the plan is approved by the creditors and confirmed by the Court then it is binding, like a contract. The Bankruptcy Code divides creditors into different classes based on their status. For instance, bank with collateral have secured claims and receive special treatment. Tax creditors have priority or get special treatment over general unsecured creditors. However, when it comes to voting on the plan, the general unsecured vote and must vote in favor of the plan for it to be accepted. There are special rules when they can be forced to accept it. This can be a complex area and there are different avenues to go down to reach an acceptable plan. This is where an experience bankruptcy attorney can be essential in providing invaluable advice to the success of the proceeding.
- How to have the Best Chance of Success in Chapter 11 Cases
The best and most successful cases are the ones that are planned as much as possible. That means preparing or updating the necessary documents, (tax returns, financial statements, financial projections etc.) Then making realistic projections of what could be paid based on sales of assets or future cash flows to the creditors of the case. Often maintaining an ongoing dialogue with the major creditors of the case can be extremely beneficial so that there is good chance they will cooperate in the Chapter 11.Often it is hard to obtain funding in a small business Chapter 11 and those who file without working capital can find that it is an extremely difficult environment to work. In other words, those who deplete their working capital until there is very little left may find themselves struggling to survive. Those who husband or protect their working capital until they file will have a much better chance of survival.
If you have further questions on this or other legal matters please contact the Law Office of Daniel M. Silvershein (www.dmsilverlaw.com ) (email: daniel@dmsilverlaw.com) to schedule a free confidential strategy Session at 1 -888-382-7880
Representative Chapter 11 Cases
Omni W.C. (Federal Bankruptcy Court, Trenton District)– The Omni case involved a manufacturing company of wall paper products in central New Jersey. Omni had fallen behind on its IRS tax obligations, New Jersey State Employment Taxes as well as trade creditors and landlord payments. The Chapter 11 Bankruptcy was filed to preserve the business until such time allowed to reach agreement with its creditors. Separate negotiations with the IRS and New Jersey Tax Department led to repayment agreements. Voting on the plan was approved by the required number of the unsecured creditors and then confirmed by the Court. The case proceeding took over 2 years to complete.
Omni W.C. continues to operate today and was pleased to receive a recent social call from its owner.
Yamaguchi Restaurant Inc. (Federal Bankruptcy Court, Southern District of New York) – This case involved New York State Sales Tax, Internal Revenue Service, and the Commercial Landlord as the major creditors of the business. The business had fallen so far behind on its sales tax obligations. The delinquency was so bad that the business had been seized by the State Sales Tax Department. The only way at that point to reopen the business was to file a Chapter 11 Bankruptcy case. Negotiations were entered with the landlord and the State Sales Tax. A workout for back rent was agreed to. New York State Sales Tax agreed to receive future payments over a long-term payback pursuant to the bankruptcy Code. A plan was confirmed by the Court.
Bronx Dance Studio (Federal Bankruptcy Court Southern District of New York) Although a not-for-profit corporation, it used the Bankruptcy Code to restructure its debts. Those involved primarily, payroll taxes for the IRS and New York State. The bankruptcy code allowed more generous payout terms then were then available outside of bankruptcy. The plan provided for payments over 72 months. The general unsecured creditors received a nominal dividend payout. The case was able to operate with Court Protection for several years before the Plan was approved by the Court.
Pommes Frittes (Federal Bankruptcy Court Southern District of New York). The case did not result in a confirmed Plan of Reorganizaiton. What it did result in was a structured dismissal order. The Debtor was able to buy time Operating in Chapter 11 with Court Protection to raise private funds which enabled it to pay off the landlord and sales tax. Then after the payments were made with Court Approval the case was dismissed and the debtor was able to continue its operations.
Agrippa (Federal Bankruptcy Court Southern District of New York) Agrippa involved a single-asset real estate case. – a Manhattan Condominium. There were related companies that were being sued by its lender for default and cross-default on the mortgages. The Chapter 11 proceeding was used to allow the debtor to protect the single asset real estate entity from the lenders due to the automatic protection afforded by the Chapter 11 Proceeding. The debtor was then able to enjoy the use of property during the pendency of the Chapter 11. This use was conditioned on the debtor’s regular monthly payments. The debtor was able to remain in possession of the condominium for over 13 months for the case was dismissed.
Each Chapter 11 Case is different and presents its own challenges and solutions. If you
Would like to discuss your challenges and possible strategic solutions to these problems.,
Please contact The Law Office of Daniel M. Silvershein (www.dmsilverlaw.com) (email: daniel@dmsilverlaw.com) or by calling 1888-382-7880
