How does Chapter 11 bankruptcy filing work for corporations?

Chapter 11 is a type of business bankruptcy that allows business entities to repay some or all of their debts over an extended period of time, often with very little interest.   Chapter 11 bankruptcy is often the primary option for corporations that are looking to use bankruptcy as a tool to reorganize their debts.  Businesses must set forth a plan of reorganization which is reviewed by the Court and then voted on by creditors for approval.

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What are the major benefits to business Chapter 11 bankruptcy?

  • It can be used to stop a foreclosure sale.
  • It can be used to cure mortgage arrears, or missed lease payments.
  • It can be used to reduce or “cram down” mortgages to their current fair market value of parcels of real property and repay that fair market value over a new extended repayment period such as 30 to 40 years.
  • It can be used to reduce or “cram down” other secured property such as secured equipment loans to the current fair market value of the collateral and repay that fair market value over a new extended repayment period that could substantially reduce the monthly payments on the loan.
  • It can be used to avoid junior mortgages on or real estate where the value of the piece of property is worth less than the most senior lien on the property or worth less than all other liens on the property combined that are senior to the lien that the Debtor wishes to avoid.
  • It can be used to stop all forms of collection activity including the levying of bank accounts, recording involuntary liens, and pending state court litigation.
  • It can be used to reject contracts such as long term commercial leases with minimized penalties.
  • It can be used to reduce the interest rate of loans or lines of credit such as secured equipment loans or loans on accounts receivables to a current market rate of interest.
  • It can used to cure or reduce nearly all types of tax debt including payroll taxes, excise taxes, and property taxes.
  • It can be used to substantially reduce most forms of unsecured debt including trade debt and credit card debt.
  • It can be used to remove judgment liens.

There is typically not a five year restriction on the repayment of debt as in Chapter 13 bankruptcy for individuals.

Who is eligible for a corporate or small business Chapter 11 bankruptcy?

C-Corporations

S-Corporations

Limited Liability Corporations (LLCs)

Limited Liability Partnerships (LLPs)

Corporations typically file Chapter 11 with the plan of emerging from bankruptcy with less debt and lower monthly expenses but sometimes file bankruptcy for the purpose of liquidating some or all of their assets free and clear of liens through the bankruptcy process which are often referred to as 363 sales.

Who is a good candidate for corporate or small Business chapter 11 bankruptcy?

  • A business that does not wish to liquidate under Chapter 7.

    A business needs to reorganize and does not wish to liquidate under Chapter 7 bankruptcy.

  • A business has the ability to become profitable but needs to shed excess debt.

    A business has the ability to become profitable but needs to shed excess debt such as commercial lease agreements or unsecured debt.

  • A business has a lot of unsecured debt.

    A business has a lot of unsecured debt that continues to accumulate high amounts of interest.

  • A business has the ability to become profitable but needs time.

    A business has the ability to become profitable but needs time to cure or reduce tax debt such as payroll taxes, excise taxes, and property taxes.

  • A company owns one or more rental property that are worth less than their fair market share.

    A company owns one or more parcels of rental property that are worth less than their fair market value and wishes to cram down the properties to their current fair market value to be repaid over a new extended repayment period such as 30 to 40 years to make them profitable again.

  • A company has one or more junior liens on its properties.

    A company has one or more junior liens on its properties and at least some of the properties are worth less than the first lien on the properties.

  • A company has a pending foreclosure sales on one of more of its commercial or rental properties.

    A company has a pending foreclosure sale on one or more of its commercial or rental properties and wishes to stop the sale and either cure the mortgage arrears or, in some cases, eliminate the mortgage arrears by rewriting the terms of the underlying loan securing the property.

Is small business Chapter 11 bankruptcy right for my company?

Chapter 11 Bankruptcy can be used to become current on missed mortgage payments, commercial lease payments, and various types of taxes including payroll taxes, excise taxes, and property taxes.

Many famous corporations have successfully reorganized under Chapter 11 Bankruptcy including the Los Angeles Dodgers, Chrysler LLC, and General Motors Corporation.

Although corporate or small business Chapter 11 bankruptcy is a very powerful tool, it is not always the best choice for all businesses facing financial problems. Speak with a Los Angeles Bankruptcy attorney today to determine if filing for corporate or small business Chapter 11 bankruptcy is the right option for your company.

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