From entertainment giants to iconic restaurants to small businesses that have been staples of communities for decades, just about every kind of business has been devastated by the past few years’ events.
In 2021, there were 544,463 bankruptcies filed. Although bankruptcy doesn’t mean that a company is going out of business, it is crucial to understand precisely how it works.
If your business is behind on its bills, it might be in your favor to hire a chapter 11 bankruptcy attorney. In this article, we’ll tell you everything you need to know about filing for Chapter 11 and some tips for hiring the best attorney for your situation.
Keep reading to learn more.
What Is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a way to restructure their finances to pay back their creditors over time. It is often called “reorganization bankruptcy.”
Chapter 11 stops creditors from collecting and helps facilitate a new way to settle debts while the business continues to run. The business might even be able to get new financing on better terms. Ultimately, the goal is to keep the business running while keeping creditors at bay while reorganizing your debt situation.
Chapter 11 is different from Chapter 7. A company is in too much debt to continue operating. Rather than reorganizing debt to keep the business alive, it is shut down, and the assets are sold. The proceeds are given to creditors.
How Does Chapter 11 Bankruptcy Work?
The critical component of Chapter 11 is developing a plan to repay creditors what is owed. After the bankruptcy court approves the plan, the business will be responsible for repaying the remaining debt. However, the legal part of the bankruptcy process will be over.
A business must file a petition for bankruptcy protection to start the process. Creditors can also file for involuntary bankruptcy to force a business that owes money into court to create a deal or plan of repayment.
After the court accepts, the creditor must stop their collection efforts such as:
- Lawsuits
- Foreclosures
- Evictions
- Property seizures
- Requests for payment
This will last throughout the case but can be lifted by the court if the creditor requests it. To gain protection, the business must submit all details about income, expenses, debts, and assets.
What Is a Debtor in Possession?
Once Chapter 11 is filed to the bankruptcy court (both voluntarily or involuntarily), the business will be considered a “debtor in possession.” The company, then, will stay in control of its assets under Chapter 11.
This is a crucial difference from other chapters of bankruptcy, where a trustee is appointed to take control of assets and run the business. In this case, the debtor in possession must fulfill all of the duties of the trustee, including:
- Filing informational reports
- Examining and objecting to claims
- Accounting for property
- And more
Once a business becomes a “debtor in possession,” it can get new loans with “debtor-in-possession” financing. This can be much cheaper than average rates that could be found before filing for Chapter 11, which can help keep the business alive throughout the bankruptcy process.
The debtor in possession can also cancel other contracts and leases that may be costing it too much. Another option the business can take (with approval by the court) is to sell underused assets. This even includes ones that are still saddled with liens. The entire business can also be sold.
Reorganization Plan
The primary key to the process of Chapter 11 is creating a reorganization plan. Which should include a proposal for how much the business will pay each creditor it owes.
Once proposed, the business will enter a meeting with significant creditors called a section 341 meeting. They will answer questions under oath about their business here.
After some back and forth, the creditors will submit their adjustments to the plan until two-thirds finally approve it by the committee. Once confirmed by the court, the legal part of bankruptcy is complete.
The debts will then be considered discharged. New deficits confirmed by the court will then replace. The business in question will need to make these new payments to creditors.
Pros and Cons of Chapter 11 Bankruptcy
Filing for bankruptcy under chapter 11 has both advantages and disadvantages that come with it. Let’s first take a look at the benefits for businesses. Pros include:
- Chapter 11 stops collection efforts by creditors immediately
- The business can continue operating under the same ownership and management
- The debtor-in-possession can borrow on better terms than previously able
- The business can get rid of leases and other contracts that may be burdening it
- The business can sell other assets to raise money
- The business can ultimately become more financially stable
It’s essential to understand the downsides of Chapter 11 as well. Cons include:
- The process is expensive because of the need for legal and other professional advice
- Cases can be drawn out for an extended period
- Selling assets and getting rid of leases and contracts need to be done with court approval
- Chapter 11 is not fool-proof and can still lead a business to shut down and liquidate
Finding the Right Chapter 11 Bankruptcy Attorney
Filing for bankruptcy is arduous for any business, but the situation can worsen if you choose the wrong lawyer. For many lawyers, bankruptcy filings have become a volume industry. Many of these firms only provide subpar legal services when settling the debt for businesses.
It’s also important to note that no two bankruptcy cases are identical. With that in mind, here are some tips for finding the best possible candidate among the many lawyers’ options.
Do Your Research
Although the process of finding a lawyer to help facilitate a bankruptcy (one that you’ll likely need to pay a significant amount) might not be the most fun process, don’t let this stop you from doing your research.
Don’t wait until the last minute. You’ll want to find the best possible lawyer, and they will also need enough time to review and prepare for your case correctly.
When looking for a lawyer, make sure that they specifically have bankruptcy case experience on their website. Because they are a famous attorney in your area doesn’t mean they know anything about bankruptcy.
You should be able to find a business bankruptcy attorney that does nothing but bankruptcy cases. This will most likely be your best bet, as they’ll know every minor detail about bankruptcy — inside and out.
Make sure to check out any attorney reviews and testimonials about the firm that you’re going with.
Consult Several Legal Professionals
Don’t just stop at one. Many of these firms offer free consultations to take advantage of to get their take on your situation. You can also consider reaching out to other business friends with bankruptcy lawyers.
Spend a Day in Bankruptcy Court
This might not sound like the most fun way to spend a day, but going to see bankruptcy lawyers in action will give you a better sense of who you want to represent. You’ll also be able to see local attorneys that specialize in what you need.
Find Out Who Sits on the Bankruptcy Court Panel in Your Area
Only well-known bankruptcy attorneys will appear regularly on this panel. You can find the names of people who serve on these committees at your local bankruptcy court.
Ask Several Questions
Once you’ve made a list of prospects for attorneys to represent you in your bankruptcy, create a list of questions to ensure you get all the information you need about the firm. Some questions include:
- What are your credentials?
- How many bankruptcy cases have you dealt with?
- How many bankruptcy cases do you handle per month or year?
- How many of those cases are business filings?
- How much access will I have to you throughout the case?
- Who will I be working with directly if not with you?
- Can I interview the person I will be working with?
- How long does the bankruptcy filing take?
- Can you explain to me the steps of the process?
Each of these questions is very important, so if it seems they are being evasive about specific topics, it might be a red flag.
Thoroughly go through the responses and compare them with other attorneys you interview. Remember, bankruptcy law is a volume industry so some attorneys may hand you off to clerks or paralegals.
Find the Best Bankruptcy Lawyer for Your Case
Going through bankruptcy with your business isn’t fun, but the lawyer you choose can make a huge difference in how smoothly it goes.
Look no further if you’re looking for the best Chapter 11 bankruptcy attorney in Philadelphia. Get a free consultation at Sadek Bankruptcy Law Offices today.