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Understanding Chapter 11 bankruptcy

by | Sep 3, 2018 | Uncategorized

When you started your Massachusetts business, you likely had a two-fold purpose: to make and/or sell a superior product or service and to make a profit by doing so. If you now find yourself in the untenable position where your business has more debts than income with which to pay them, you may qualify for Chapter 11 bankruptcy protection. A business debt of less than $2.19 million and employment of 500 or fewer employees are the only two qualifications for obtaining small business Chapter 11 relief.

Somewhat similar to a Chapter 13 personal bankruptcy, Chapter 11 is a reorganization process, not one wherein the majority of your company’s debts become discharged. The whole purpose of Chapter 11 is to give your business the opportunity to regain its profitability by allowing you to renegotiate its leases, contracts, etc. so as to obtain more favorable terms. More favorable terms usually lead to lower debt payments.

Chapter 11 reorganization plan

Upon filing for Chapter 11 bankruptcy, you must then, within 180 days, come up with your company’s reorganization plan. None of your company’s creditors can harass you or your company for payment of its debts during this six-month period by means of telephone, snail mail, email or any other debt collection methodologies. Instead, the law requires them to negotiate with you to arrive at new debt terms.

Once all your company’s creditors have negotiated with you in good faith, the new terms related to your company’s debts become incorporated into your reorganization plan. Then the creditors must vote to approve it.

Creditor classifications

Under Chapter 11, the court divides your creditors into the following three categories:

  1. High priority creditors; i.e., the IRS, the Massachusetts Department of Revenue, your stockholders, if any, and all employees to whom your company owes back wages
  2. Secured creditors; i.e., the creditors to whom you and/or your company provided collateral
  3. Unsecured creditors; i.e., the creditors to whom you and/or your company provided no collateral

Each creditor in the first two categories constitutes its own individual class. During your negotiation period, you negotiate individually with each high priority and secured creditor. Your company’s unsecured creditors, however, make up one large class, and you negotiate with them as one group.

Working your plan

Once the bankruptcy judge confirms your reorganization plan, (s)he then discharges any of your company’s debts not addressed in the plan. You thereafter proceed to operate your business as usual, making your new debt payments to your company’s remaining creditors per the plan. By the end of your company’s bankruptcy period, it should have recovered its financial footing and be ready for post-bankruptcy profitability. That is the whole purpose of Chapter 11.