- November 3, 2024
- Kelvin Birk
- Bankruptcy
You have worked hard to build your Missouri business, but have run into some snags and find yourself in a financial bind. You are faced with some tough choices, and one of them is deciding whether you should file for Chapter 11 bankruptcy.
While no one wants to have to file for bankruptcy, there are times that doing so is your best option and allows your business to get a fresh financial start. How do you know if Chapter 11 bankruptcy is the right solution for you? It is important to understand how bankruptcy works, what the benefits and drawbacks of filing Chapter 11 are, and how these apply to you. A consultation with an experienced Missouri business bankruptcy attorney can give you a deeper understanding of how Chapter 11 will affect your individual situation, but to get started, the following is some basic information to help you decide if Chapter 11 is right for your Missouri business.
Understanding Chapter 11 Bankruptcy
The United Staes offers several types of bankruptcy to help debtors get back on their feet again. Chapter 11 of the U.S. Bankruptcy Code is most often used by businesses, usually a corporation or partnership, but it can also be used by individuals and small-business owners. In Missouri, Chapter 11 bankruptcy is most often used by businesses.
In general, Chapter 11 allows debtors to propose a reorganization plan that will keep their business alive and also pay their creditors over time in a manner that is affordable. The plan is a contract between the debtor and the creditors that outlines just how the business will operate and pay its debts in the future.
Under Section 1107 of the Bankruptcy Code, the debtor has the rights and powers of a Chapter 11 trustee and must perform all the investigative functions and duties of a trustee. These duties include accounting for property, examining and objecting to claims, and filing monthly operating reports or other informational reports required by the court and the U.S. trustee or bankruptcy administrator (11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a)).
This means that when you begin the Missouri Chapter 11 bankruptcy process, you typically remain in control of your business. You are required to perform all of the investigative functions and duties of a trustee. You are able to reorganize your finances and get a debt repayment plan approved that you can manage, restructure business debts, and obtain new financing in order to return the business to profitability.
If you successfully complete your bankruptcy plan, you will receive a discharge of certain dischargeable debts. You will wind up with reduced debt and a reorganized and more profitable, business, which enables you to move forward with rebuilding business and your life. If for some reason you are not successful, a Chapter 11 case may sometimes be converted to a liquidating Chapter 7 bankruptcy.
Benefits of Chapter 11 Bankruptcy
The main benefit of Chapter 11 is that your business is allowed to continue operating. Your debt is restructured in order to give you lower payments you can afford. There is an “automatic stay,” which prevents foreclosures and ongoing efforts for debt collection, so you will not be harassed. The stay protects you from all lawsuits, bank levies, foreclosures, repossessions, and wage garnishments.
During the process, the debtor and all creditors are brought into the same court, which allows the rights of all parties to be decided in a balanced manner. You can get on with the task of running the business without having the stress of dealing with creditor demands and other time-consuming issues.
To summarize, the key benefits of filing Chapter 11 include:
- You maintain control of and continue to operation the business, while restructuring debts and creating a repayment plan you can afford.
- You have protection from creditors while reorganizing and for the life of the plan.
- You have potential to modify residential mortgages used for business purposes, change the terms of previous debt, and to take out new loans at better rates.
- Your company can emerge from Chapter 11 stronger and with greater financial controls in place to handle future challenges.
Drawbacks and Considerations of Chapter 11
While Chapter 11 has many benefits, there are some drawbacks and considerations you need to weigh carefully before proceeding. Here are some potential issues to think about:
Drawbacks:
- Need for profitability: You cannot file for Chapter 11 unless you can show that your company will be profitable once your debts are reorganized.
- Loss of privacy: When you file for Chapter 11, you must file detailed financial information with the bankruptcy court, which becomes public record. This information is available to competitors, clients, and anyone who wants to know more about your financial situation.
- Financial reporting requirements: You must maintain and report detailed financial records such as revenue and expenses throughout the Chapter 11 process.
- Some loss of control over business operations: You may still have control over activities that occur within the ordinary course of business, but activities that fall outside this sphere, such as selling or buying assets and borrowing money, require court approval. In some situations, the original shareholders of a corporation may lose their position completely.
- Limits on compensation for insiders: There may be restrictions on how much you can pay officers, directors, or major shareholders of corporations.
- Costs: There are certain costs for filing Chapter 11 and a certain stigma for having poorly run your business to the point of having to file. In addition, Chapter 11 often takes years to complete.
Considerations:
In addition to the drawbacks, there are other considerations to make before filing for Chapter 11. For a business run by a sole proprietor or partners, personal assets may not be perfectly protected. There may be other debt-relief options that may work better, such as Chapter 13 bankruptcy or debt restructuring; but for individuals, Chapter 11 may be necessary if debts exceed the limits allowed by Chapter 13. In addition, there may be long-term effects on the business and its relationships with creditors, suppliers, and customers, since these entities may feel they can no longer depend on your business.
Is Chapter 11 Right for Your Business?
Before deciding that filing for Chapter 11 is right for you, it is essential to weigh any negatives against the positives of having your business return to profitability. Every situation is unique, so before making a decision, it can help to consult with a qualified bankruptcy attorney who can examine your individual situation and assess all your circumstances
If you are a debtor whose financial obligations have become overwhelming, attorney Kelvin Birk can examine your financial situation to determine whether Chapter 11 or some other bankruptcy or debt-relief solution is right for you. We understand what you are going through and offer personalized and compassionate service for all your business needs.
Call us today for a free consultation to discuss your individual business issues and get started on the road to a brighter financial future.
FREE CONSULT CALL NOW 573-332-8585
Attorney Kelvin Birk
Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]
