How Can a Business File for Bankruptcy?
There are two ways a business can file for bankruptcy: 
Chapter 7 and Chapter 11


 
 
















Business Bankruptcy Information 
Chapter 7 Business Bankruptcy 
Chapter 11 Business Bankruptcy 

Chapter 7 Bankruptcy involves the selling off (or "liquidation") of a business' property to pay off debts. The bankruptcy process starts when the business files a petition with the bankruptcy court. The petition must list all of the business' property, debts, and recent financial history.

Chapter 11 Bankruptcy allows a business to reorganize its finances, eventually pay off its debts, and continue operating once bankruptcy is complete. This process starts when the business files a petition for Chapter 11 Bankruptcy with the bankruptcy court. The business is then given 120 days to come up with a plan to reorganize the business in a profitable way.


Are mounting debts threatening the future of your business? There are special bankruptcy plans geared towards businesses. A Chapter 11 business bankruptcy is an effective way to restructure overwhelming debt, allowing a business to repay creditors in installments and buying time for the business to recover from a serious downturn.
Chapter 11 bankruptcy can put your company in a position for future success after paying off your debts. If your company is struggling to get off the ground because of your debts, the end goal of chapter 11 bankruptcy is to leave you with a viable business after the plan has finished. our lawyers team have vast experience in bankruptcy litigation, reorganization, workout and debtor-creditor relations. We are a popular choice for clients seeking advice when commercial transactions, credit agreements, business plans, and mortgages fail to proceed as intended.  Well known in both the regional and national bankruptcy bar,  the firm stands out in its experience representing debtors, creditors, and creditor committees in significant Chapter 11 cases.  Specifically, we have full scale capability in handling:

- Boards of directors and management of troubled companies before and during Chapter 11 Proceedings, including counseling financially distressed companies of viable alternatives to commencing a bankruptcy case, problems and solutions which may or will arise in bankruptcy cases and structuring the potential resolution of same prior to their emergence  

- Cash collateral negotiations and debtor- in- possession financing arrangements 

- The purchase and sale of businesses and assets from Chapter 11 debtors 

- Complex Chapter 11 plan negotiations and the litigation of contested plan confirmation issues 

- Preference litigation and fraudulent conveyance litigation 

-  Enforcing the rights of secured creditors 

-  Single asset real estate partnership cases 

-  Corporate restructuring advice

FAQ 

What happens to my corporation if I file personal bankruptcy?

Since the corporation is a legal entity different and distinct from its shareholders, the bankruptcy of a shareholder does not affect the corporation.  The bankrupt shareholder's shares in the corporation are an asset of his bankruptcy estate.  The value of the shares in the hands of the bankruptcy estate is a function of the share's marketability, the percentage interest they represent of the corporation, and the net value of the corporation's assets.

Can I file bankruptcy only on my personal debts? only on business debts?

No, a bankruptcy filing must include all of the debtor entity's debts, regardless of how or why incurred.  You might, however, be able to separately classify business debts and pay them in full in a Chapter 13 if necessary to continue to utilize vendors.  An individual debtor can also reaffirm debts.

What is a Chapter 11 Bankruptcy? 

A Chapter 11 bankruptcy is often referred to as “business reorganization.” Chapter 11 is the reorganization provision under the Title 11 of the U.S. Bankruptcy Code that allows companies to restructure their debts while they continue to engage regular operations or to liquidate operations in an orderly manner. A Chapter 11 Bankruptcy case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a business "reorganization" bankruptcy. Also, Chapter 11 Bankruptcy is available to individuals but is rarely used by them. 

What Is the Purpose of Chapter 11 Bankruptcy? 

The purpose of a Chapter 11 Bankruptcy is to get a repayment plan or plan of reorganization approved by the Bankruptcy Court and allow a Chapter Debtor to repay or restructure its Debt over time. Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership facing financial difficulty. Chapter 11 Bankruptcy’s primary purpose is for the Debtor is to reorganize their Debt through a Bankruptcy reorganization plan approved by the Bankruptcy Court. 

Doesn’t Chapter 11 Bankruptcy mean liquidation? 

Chapter 11 Bankruptcy is reorganization, not liquidation. The primary purpose of filing Chapter 11 protection is to reorganize a debtor. A Chapter 11 Bankruptcy can also be utilized to liquidate the assets of a business and pay the creditors from the realization or sale proceeds of those assets if a liquidation plan is proposed and approved by the Bankruptcy Court. A Chapter 11 liquidation plan can oftentimes obtain a greater realization for creditors than a Chapter 7 Bankruptcy filing. In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than Chapter 7 liquidation. It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case. 

Can My Company still file bankruptcy after the law change? 

Yes.  The new law changed the Bankruptcy Code and rules which primarily include certain pre-filing requirements for consumers, but the law did not affect the right of companies and individuals to file for Chapter 11 Bankruptcy protection. 

Who can file for Chapter 11 Bankruptcy? 

A Business filing for Chapter 11 Bankruptcy can be a corporation, partnership, limited partnership, limited liability company, or sole proprietorship. A bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors. Chapter 11 Bankruptcy is also available to individuals not engaged in business but is rarely used by them. Chapter 11 Bankruptcy is primarily utilized by businesses to reorganize their obligations and pay their debts over time. Businesses that choose to take advantage of Chapter 11 relief continue to operate their business while repaying their debts. 

What common reasons do businesses or individuals file Chapter 11 Bankruptcy? 

Most often Chapter 11 Bankruptcy is utilized by a business or individual with excessive debt to reorganize their financial affairs. Additionally, debtors file for Chapter 11 to reject certain leases or to stop or stay lawsuits, turnover actions, judgments, collection activities, foreclosures, and repossessions of property. When a debtor files Chapter 11 Bankruptcy all such actions against the debtor are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition with some exceptions. 

How long does a Chapter 11 Bankruptcy take? 

A chapter 11 bankruptcy case may continue for many years unless the court, the U.S. trustee, the creditors committee (if one is appointed), or another party in interest acts to ensure the case's timely resolution. 

How does a Chapter 11 Bankruptcy filing protect the debtor? 

Simply put filing for Chapter 11 Bankruptcy stops all collection actions against the debtor while allowing the debtor time to make a plan to reorganize. When a business files for Chapter 11 Bankruptcy it is protected by the automatic stay which takes place immediately upon the filing of the petition. As with all cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. 11 U.S.C. § 362(a). The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. § 362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation. No creditor can take any action against the debtor without the court granting relief from the automatic stay. 

What is The Discharge in a Chapter 11 Bankruptcy? 

The confirmation of a Chapter 11 plan discharges the debtor from any debt or debts arising before the date of confirmation. After confirmation of the plan, the reorganized debtor and its creditors are bound by the terms of the confirmed plan. A confirmed plan creates new contractual rights, replacing or superseding any and all prepetition contracts with creditors. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. There are, of course, exceptions to the general rule that confirmation of a plan operates as a discharge. Confirmation of a plan of reorganization discharges any type of debtor – corporation, partnership, or individual – from most types of prepetition debts. It will not, however, discharge an individual debtor from any debt made nondischargeable by section 523 of the Bankruptcy Code. 

What is The Automatic Stay in Chapter 11 Bankruptcy? 

The automatic stay is an injunction that takes effect immediately upon the filing of a Chapter 11 Bankruptcy Petition. The automatic stay provides a period of time in which all legal actions against the Debtor, which include judgments, collection activities, foreclosures, lawsuits, and repossessions of property are stayed or suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other all other chapters of the Bankruptcy Code, a automatic stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. § 362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation. Under specific circumstances, secured creditors can obtain an order from the court granting relief from the automatic stay. 

Were there any changes to Chapter 11 Bankruptcy under the new Bankruptcy Law? 

Expedited Chapter 11 created for small businesses - Businesses with less than $2 million in debts can file an expedited form of Chapter 11 reorganization. Real Estate Owners & Investors - unexpired leases on non-residential real estate will automatically be deemed “rejected” if a debtor doesn’t file a motion to assume or reject the lease within 120 days after the commencement of the Chapter 11 Bankruptcy case. The Bankruptcy Court may extend the period, for no more than 90 days, for cause. Any other extensions are only permitted with the lessor’s consent, and a lessor’s ability to recover administrative expenses from the debtor’s estate that assumes a commercial lease and later rejects it is limited to all monetary obligations due under the lease, two years following the date of actual turnover of the leased premises. Chapter 11 exclusivity period shortened - A Chapter 11 debtor has only 18 months to propose a reorganization plan before creditors are allowed to propose their own plans. Prior to the Act, creditors were barred from making proposals indefinitely due to the debtor's ability to obtain extensions. Taxing Authority Remedies - There are several provisions affecting the tax liability of all debtors and bankruptcy estates, as well as a taxing authorities’ ability to assert priority claims and seek other remedies. Other changes require that a disclosure statement supporting a proposed plan of reorganization include a broader discussion of Tax consequences and liability issues and adds an exception to the automatic stay empowering Taxing Authorities to offset any Tax refunds owed to debtors against certain unpaid prepetition Taxes. There are other changes however you should contact an attorney for more information.

What is a Creditor’s Committee? 

The U.S. Trustee appoints the creditor’s committee if requested, possible, or deemed necessary. The creditor’s committee usually consists of several creditors who hold the largest unsecured claims in the Chapter 11 Bankruptcy Case. A creditor’s committee may consult with the Debtor on the administration of the case, investigate the debtor's conduct or business operations, and participate in the formulation of a plan of reorganization. Also, the committee can hire its own lawyer, and the legal fees are usually paid from the Debtor's bankruptcy estate. Basically a creditor’s committee is appointed by the U.S. Trustee and monitors the Debtor’s affairs. 

Who is the Purpose of The United States Trustee? 

The United States Trustee monitors the progress of a Chapter 11 Bankruptcy case. The U.S. Trustee reviews the debtor's monthly operating reports, applications to employ professionals, motions for fees, and any plan or disclosure statement filed in the case. The U.S. Trustee conducts the initial Debtor’s conference and the 341 creditors' meeting at the beginning of the case where their representative and creditors may question the debtor concerning the debtor's conduct, assets, and the plans for reorganization. The U.S. Trustee also imposes certain requirements of the Chapter 11 Debtor such as the filing of monthly operating reports, the opening new Debtor-in-Possession bank accounts, and ensuring the payment of current employee withholding and other taxes. During the pendency of the case the Debtor is required to pay a quarterly fee to the U.S. Trustee. The amount of the fee is based upon the disbursements made in the prior quarter and can add significant expense to a Chapter 11 case. 

What is a Debtor-In-Possession? 

Upon the filing of a Chapter 11 Bankruptcy Petition the Debtor becomes a Debtor-In-Possession which is exactly as it is stated. The debtor has possession of it’s company and affairs until such time that a trustee is appointed to take control of the Debtor or until the case converts to a Chapter 7. A debtor in possession owes a fiduciary duty to the Bankruptcy Estate and has the powers of a bankruptcy trustee. These duties include accounting for all property, examining claims, objecting to claims, filing tax returns and monthly operating reports as required by the Bankruptcy Court and the United States Trustee. A debtor in possession has the power to employ attorneys, accountants, brokers, or other professionals, subject to Bankruptcy Court Approval. Should a debtor in possession fail to comply with the U.S. Trustee requirements, fail to comply with court orders, or fail to take appropriate steps to propose or submit a plan for confirmation, the U.S. Trustee, a creditor, or party in interest may file a motion to appoint a case trustee, convert the case to Chapter 7, or dismiss the case. 


What is a Single Asset Real Estate Debtor? 

Just like it sounds, a Single asset real estate Debtor owns a single real estate asset such as an apartment complex, shopping center or strip mall, or similar property. These so named single asset real estate debtors are subject to special provisions of the Bankruptcy Code. The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 

Does my Company need an Attorney to File Chapter 11 Bankruptcy? 

Yes. Corporations and other business entities in Michigan cannot represent themselves in a legal proceeding and require legal counsel. As for Chapter 11 Bankruptcy in Michigan the same thing applies. 

The entire process of Chapter 11 Bankruptcy proceedings tend to be very complex and time consuming. Businesses considering seeking bankruptcy relief under Chapter 11 must utilize an attorney who is experienced in handling Chapter 11 Bankruptcy cases. 

What is Chapter 7 bankruptcy for businesses? 
 
Some companies are so far in debt that they can't continue their business operations. They are likely to "liquidate" and file under Chapter 7. Their assets are sold for cash by a court appointed trustee. Administrative and legal expenses are paid first, and the remainder goes to creditors. Secured creditors will have their collateral returned to them. If the company doesn't have enough money to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Bondholders, and other unsecured creditors, will be notified of the Chapter 7, and should file a claim in case there's money left for them to receive a payment.

Stockholders do not have to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims for anything left over.

Are all debts discharged in a business bankruptcy? If not, which ones are not? 
 
No debts are discharged in a corporate Chapter 7 bankruptcy.

Can the trustee sue the general partners of a partnership if the partnership cannot pay all its outstanding liabilities under a bankruptcy filing? 
 
Yes, if the partners have signed a guarantee of payment of the partnership's debts; most creditors require such guarantees from at least one partner.
 

How does Chapter 11 bankrutpcy filing work? 
 
The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt.

The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly.

Steps in the Chapter 11 Process

The steps outlined below refer to a regular Chapter 11 business filing. It should be noted that companies falling under the definition of “small business debtor” under the bankruptcy code are put on a “fast track” and treated somewhat differently than in a regular Chapter 11.

Bankruptcy Filing. The process commences when a bankruptcy petition is filed with the bankruptcy court. The petition may be filed by the company (a voluntary petition) or by creditors of the company (an involuntary petition). At the time of filing, certain provisions automatically come into play: 

Appointment of Trustee. In most Chapter 11 cases, whether voluntary or involuntary, the debtor automatically assumes the identity of “debtor in possession” and will continue to operate the business and maintain control of its assets while undergoing the reorganization. In a small number of cases, a separate trustee may be appointed or elected. 

Automatic Stay. A stay of creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed. This automatic stay is a statutory "order" which protects the debtor and property, and prohibits actions by creditors after the filing of a bankruptcy. In general, it applies to all creditors (both secured and unsecured). 

Avoidable Transfers. The debtor in possession or the trustee has “avoiding” powers that can be used to undo a transfer of money or property made during a specific time period prior to the filing of the bankruptcy petition. Generally, this power is effective only against transfers made within 90 days prior to the filing of the petition. Avoiding powers are used, for example, to prevent unfair payments to one creditor at the expense of other creditors. 

Disclosure Statement. The debtor files a written disclosure statement with the bankruptcy clerk. The statement must contain 
a list of creditors a schedule of assets and liabilities, current income and expenditures a statement of the debtor’s financial affairs 
The information must be sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization.

Notice to Creditors. The court clerk sends a notice of filing of the petition to all creditors on the list of creditors (mentioned above). 

Filing Proofs of Claim. The Court will assign a date (the "General Bar Date") by which the Proof of Claim must be filed. This date is usually listed on the Notice to Creditors. Creditors whose claims are listed on the schedules provided by the debtor are not required to file proofs of claim, but can if they wish to do so. Proofs of claim must be filed on claims that are not listed on the debtor’s schedules, or are listed as disputed, contingent or unliquidated. Proofs of claims must be filed with the bankruptcy clerk in the district where the case is pending. It is the responsibility of the creditor to determine whether its claims are accurately listed. As a general rule, a creditor should file a Proof of Claim as soon as (1) the Notice to Creditors is received, or (2) the creditor finds out from the debtor or a third party that the bankruptcy has been filed. 

Unsecured Creditors’ Committee. The United States Bankruptcy Trustee, a federal official, appoints a committee of unsecured creditors – usually the seven largest – to represent the interests of all unsecured creditors. This Committee can hire professionals, including lawyers and accountants, to monitor the company’s actions. The debtor is responsible for paying the cost of retaining these professionals. 
 
Plan of Reorganization. There is a 120-day period, from the time of filing the Chapter 11, during which the debtor has the exclusive right to file a reorganization plan. Once this period has expired, a creditor or the case trustee may file a competing plan. The contents of the reorganization plan must include a classification of claims (debts) and must specify how each class of claim will be treated under the plan. Section 1123(a) of the Bankruptcy Code lists the mandatory and discretionary provisions of a Chapter 11 plan of reorganization. The debtor in a Chapter 11 also has a one-time absolute right to convert the Chapter 11 case to a Chapter 7 liquidation if he/she is the debtor in possession and if the bankruptcy is voluntary. 

Court Approval of Disclosure Statement. Before a plan of reorganization can be voted upon, the court must hold a hearing to determine whether the disclosure statement is approved. 

Vote on Reorganization Plan. Once the court has approved the disclosure statement, the plan of reorganization is considered by the creditors. All creditors and equity security holders will be mailed: the plan, or a court approved summary of the plan the disclosure statement approved by the court notice of the time within which acceptances and rejections of the plan may be filed such other information as the court may direct notice of the time fixed for filing objections notice of the date and time for the hearing on confirmation a ballot for accepting or rejecting the plan The debtor in possession has 180 days after the filing of the petition to obtain acceptances of the plan. All creditors have the right to vote on the plan.

Confirmation Hearing. The bankruptcy code requires the court to hold a hearing on confirmation of the plan after notice is given to all interested parties. If no objection to confirmation has been timely filed, the court must then determine if: 
the plan is feasible; it is proposed in good faith; and the plan and the proponent of the plan are in compliance with the Bankruptcy Code. Confirmation of the plan discharges the debtor from most debts existing on the date the petition was filed. This discharge is the law’s embodiment of what is probably the most important purpose of bankruptcy, giving the debtor a fresh start financially.

Post-Confirmation Administration and Modification. After the plan is confirmed the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. Any time after confirmation, the plan can be modified, assuming any modifications are warranted by circumstances, meet certain Code requirements, and are approved by the court. 
The order in which payments are made is fixed by Federal statute. The general rule is that those who take the least risk are paid first. (See section 726 of the code, or our article “Introduction to Chapter 7” for further information on payments.)

Final Decree. A final decree closing the case must be entered after the estate has fully administered the plan of reorganization. 
While the steps described here seem relatively straightforward, the U.S. Bankruptcy Code is quite complex and filled with exceptions and special rules under specific circumstances. It is possible for Chapter 11s of large companies with hundreds or thousands of creditors to take years to reach a final decree. If you have questions or concerns regarding a specific Chapter 11 filing, it is prudent to seek advice from a qualified bankruptcy attorney.


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