In this article, we will explain Chapter 11 bankruptcy and how it can be a viable option for small businesses in Illinois. We answer the following questions:
Chapter 11 bankruptcy is a type of bankruptcy typically reserved for large corporations but in the right circumstances, can be the best bankruptcy instrument for a small business. Small business owners filing for bankruptcy whose debt exceeds the limit for Chapter 13 and would like to keep operating their business under some degree of profitability should strongly consider Chapter 11 bankruptcy. Under Chapter 11 bankruptcy a Small Business is one in which the debts do not exceed $2,566,000. Upon filing Chapter 11 bankruptcy the debtor becomes what is called the Debtor-In-Possession (D.I.P.), with new bank accounts opened and designated as such. The goal of Chapter 11 bankruptcy is to allow the debtor(s) some breathing room to renegotiate contracts and reorganize debt into a plan which will be paid off over the number of years determined in the planning phase.
Small Business Chapter 11 bankruptcy shares many of the benefits found in other types of bankruptcy, including:
Chapter 11 bankruptcy is a lengthy process and involves a lot of work, but the key to having a successful Chapter 11 filing is to have everything prepared before the actual filing.
Below is a list of documents and schedules to be included when filing Chapter 11 bankruptcy:
Having a good accountant, along with having a good bankruptcy attorney is very helpful in making sure you have the right schedules and documents and that everything is accurate. It’s also highly suggested to complete any pertinent appraisals before entering into Chapter 11 bankruptcy.
As of writing this, the filing fee for Chapter 11 bankruptcy is $1,717.00, which includes administrative charges. However, the bulk of the expense in Chapter 11 bankruptcy comes from attorney fees, accounting fees, and fees for any other help in preparing and overseeing the bankruptcy process. The average cost fluctuates significantly based on the size of the company, the value of assets involved, the number of principals, etc.
Attorney fees will need to be paid prior to filing and any initial fees after filing will need to be approved by the bankruptcy court. The court will also evaluate the fees paid prior to filing, along with any other payment made prior to filing above $600, to check for preference transfers or fraudulent payments. Any other professionals hired after filing to help assist with Chapter 11 bankruptcy must be approved by the court. There is also a minimum fee of $325 that must be paid to the trustee on a quarterly basis.
If you’ve done your due diligence before filing you should have a pretty good idea of what your plan to get out of debt and back to profitability will look like before the official bankruptcy process even begins. Much of the success of Chapter 11 bankruptcy hinges on the judge believing your company will be able to pay its debts, climb out of bankruptcy, and into profitability.
The plan rarely exceeds a period of five years, during which time the debtor will be making monthly payments to creditors or will have an agreement to make a future payment based on the sale of assets. The initial six months in a Chapter 11 bankruptcy sometimes acts as a trial period to see how the company performs and to what degree it can expect to pay back its creditors over the next 3 to 5 years. Creditors will be allowed to vote on the plan and if they vote to reject the plan the bankruptcy attorney must argue that the company is doing everything it can to pay back it’s debts and the proposed plan is optimal for all parties involved.
Chapter 11 bankruptcy is not always the right fit for a small business. In fact, between Chapter 7, Chapter 11, and Chapter 13 bankruptcy it’s the least common option. However, for larger small businesses with an appropriate amount of debt, that feel they have a solid plan to get back to profitability, Chapter 11 bankruptcy can be a great option. Give us a call at 630-324-6666 to speak with one of our qualified team members and find out if Chapter 11 bankruptcy is right for your business.
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