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Chapter 11 Bankruptcy – Large Reorganization

Overview

Chapter 11 Bankruptcy focuses on the reorganization of finances for businesses, particularly large corporations. Part of the reason for this is that Chapter 11 bankruptcy is complicated and expensive to execute, but also more flexible, such as having no limitations on the amount of debt to be addressed. Businesses use this option when there is a need to restructure their debt in order to stay in business. When businesses run into trouble, having time to restructure their debts can give them a chance to stay in business. Corporations that have utilized this bankruptcy option include:

  • Delta Airlines Delta Airlines
  • United Airlines United Airlines
  • Macy’s Macy’s
  • General Motors General Motors
  • Toys R Us Toys R Us
  • Target Target

Companies that utilize the Chapter 11 option can be large corporations, Limited Liability Companies (LLC’s), partnerships and sole proprietorships.When businesses become overwhelmed by debt, and lack the healthy financials they need to stay stable, they look to reorganize past-due debt, stop the payment of the past-due debt, and seek help from a court to reorganize finances. Businesses do need to show the court that the Chapter 11 option will result in paying creditors more than they would receive in a Chapter 7 Bankruptcy via the liquidation of assets.

The goal of a Chapter 11 Bankruptcy is for a business to once again achieve profitability through the application of assorted tactics. These may include:

  • A total discharge of some debt
  • Repayment of other debt
  • Liquidation of assets
  • Reduction of workforce
  • Termination of long-term contracts, such as leases

A key part of the Chapter 11 Bankruptcy process is the development and publishing of a reorganization plan. This includes a disclosure statement to creditors, who then analyze the feasibility of the plan, and the probability of debt recoupment through this plan. The written disclosure contains all relevant information regarding assets, liabilities, and business affairs of the debtor. The disclosure should aim to provide all information needed to enable a creditor to make an informed judgment about the debtor's plan of reorganization.

Chapter 11 Bankruptcy – Large Reorganization

The next step in the Chapter 11 Bankruptcy process is confirmation. During this time, creditors vote on the reorganization plan. Creditors are grouped into classes, and their votes weighed accordingly. This is based on the type and amount of debt they hold. The plan must be approved by the creditors, and by a bankruptcy court judge. Occasionally, the debtor company gets to finalize how it will navigate the Chapter 11 process, and when this happens, it is called a “cram down.”

Next is the post-confirmation period, where the debtor executes the reorganization plan. Taking steps to reduce its debt and making payments to creditors takes place. If this stage is successful, with time, the bankruptcy is discharged. Only 10% of Chapter 11 bankruptcies reach a successful end. More often, they end up in Chapter 7 Bankruptcy where they need to liquidate their assets to

In some cases, the Chapter 11 Bankruptcy is filed by the business’s creditors, and not the business. The party filing the bankruptcy with the court is responsible for court fees. Similarly, if the debtor does not propose a reorganization plan, the creditors can propose one instead.

It is important to note that a debtor does not have to be a business to qualify for Chapter 11 Bankruptcy. It is rare that an individual debtor has enough debt to justify a Chapter 11 bankruptcy rather than Chapter 7, but it does occur in rare cases.

Consequences of Chapter 11 Bankruptcy

Chapter 11 Bankruptcy – Large Reorganization

Chapter 11 Bankruptcy can be time consuming and expensive.In theory, businesses can get Chapter 11 handled in just a couple of months, but most cases take multiple years. The reason for this is that Chapter 11 usually involves many steps, including disclosures, committees, hearings, special accounts, audits, votes and, sometimes even refinancing and oversight by the U.S. Trustee’s Office. All of these take time and add up, so the more complicated the bankruptcy case, the longer it might take.

Court and legal fees are another consequence of the Chapter 11 Bankruptcy process. The filing fee is over $1000, U.S. Trustee’s Office assesses administrative fees, and legal help can be very expensive as this process requires a lot of lawyer time.

A Chapter 11 Bankruptcy, like all other bankruptcy filings is also a public record. Large companies filing Chapter 11 often make the national news, and that almost always shakes investors’ confidence and lowers the company stock price for publicly traded corporations. Finally, being in a Chapter 11 bankruptcy can cause the debtor to have a hard time getting new financing or forming strategic partnerships with other businesses.

How Businesses Decide Whether to File for Chapter 11 Bankruptcy

Chapter 11 Bankruptcy – Large Reorganization

In order to decide to file for Chapter 11 bankruptcy, a business needs to carefully assess its financials and determine if they can catch up with their debts while staying in business without declaring bankruptcy. If there is a chance they can catch up with their debts in a reasonable period of time and stay in business, they should avoid filing bankruptcy. This might entail working with their creditors directly to renegotiate contracts, settle debt with a payment lower than the total amount owed, or developing a repayment plan. All of this can be done without Chapter 11 filing, but it takes a lot of work, time, and dedication. They also may need legal help, and may need to downsize their operations. Still, they save money and their image if they avoid filing for bankruptcy.

If after taking a close look at their financials it becomes apparent that a business cannot come out from under its debt without a formal process, then Chapter 11 may be the way to go, particularly for large corporations. Companies do a lot of research, consult with their stakeholders, and consider all other options when making a decision of this magnitude.

A decision to file for Chapter 11 is a complicated one, and the process is not always successful. Still, some companies are able to come out of Chapter 11 Bankruptcy stronger and healthier and achieve long-term success.

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