If your business is facing tough financial times due to mounting debt and a lack of cash flow, you may wonder what you can do to pull your enterprise back from the brink. Companies in financial turmoil might turn to reorganization through the Chapter 11 bankruptcy process.
You probably have learned that bankruptcy involves liquidation. This is true for Chapter 7 bankruptcy. However, business owners can attempt Chapter 11 first, allowing them to restructure their companies to become more profitable, continue operations and pay off outstanding amounts.
A look at Chapter 11 bankruptcy
The first step in the Chapter 11 process occurs when the business files a petition with the bankruptcy court. This document outlines the assets, liabilities, income and expenses of the company.
While in Chapter 11 bankruptcy, creditors cannot make collection calls or pursue legal action to collect on debts. This provides the business breathing room to get back on its feet financially. During this time, the business works with creditors to develop a reorganization plan that allows the company to pay back some or all of its debts over time. Creditors must approve the plan for it to go into effect.
A look at reorganization
The business develops a reorganization plan showing how it will repay creditors. The plan groups creditors by debt type. If the majority of creditors in each group approve, the court confirms the plan.
From there, the business works to execute that plan. It must make payments to creditors according to the terms laid out in the plan. As long as the company sticks to the plan, it eventually emerges from Chapter 11 bankruptcy, with the judge discharging the remaining debt.
According to the U.S. Courts website, 4,918 Chapter 11 filings took place in 2022. However, not all of these bankruptcies proved successful. Some companies fail to complete reorganization. In such cases, a bankruptcy judge generally converts the case to Chapter 7 to liquidate the business.
However, if business reorganization proves successful, a company can avoid closing down and return to financial solvency and normal operations. Even if some debts remain, a business can negotiate better repayment terms so the amounts are not as burdensome.