When a business becomes unable to meet its debt obligations, bankruptcy can be a viable option to correct the issue. Chapter 11 bankruptcy in California is available to struggling businesses and is slightly different from Chapter 13 bankruptcy that individuals file. It begins the same way: with a voluntary petition in bankruptcy court (although creditors or shareholders can file an involuntary petition). One of the primary differences in the two types of bankruptcy is that while in Chapter 13 bankruptcy, a bankruptcy trustee is assigned by the bankruptcy court to manage the bankruptcy estate of the debtor, in Chapter 11 bankruptcy the company retains the right to remain in control of its property. This is often referred to as debtor-in-possession.
One of the main purposes of Chapter 11 bankruptcy is to allow a business to remain operational while it negotiates with its lenders and shareholders. The idea here is that the company, while needing operational and management changes, is best suited to administer bankruptcy estate property to its creditors, versus a court-appointed bankruptcy trustee. The U.S. bankruptcy court also holds the power to step in and appoint a trustee in special cases where it is deemed necessary.
Bankruptcy Court’s Role in Chapter 11 Bankruptcy
Even though a debtor-in-possession has more power to administer their own bankruptcy estate, the bankruptcy court still has control over many important decisions of the company. The bankruptcy court overseeing the Chapter 11 case must approve the sale of property (excluding inventory), new lease agreements, new secured financing arrangements, and the payment bankruptcy attorney fees, among others. Within 4 months of filing a petition for Chapter 11 bankruptcy, a company must submit a plan for how they propose to pay back creditors and restructure its debt. The bankruptcy court then rules on the feasibility, good faith, interest of the creditors, fairness, and equitability of the plan and either approves or denies the proposed plan. If the bankruptcy court approves, the plan is referred to as confirmed and the company is cleared to proceed with carrying out its restructuring plan.
Should I file Chapter 11 Bankruptcy for my Business?
Chapter 11 bankruptcies have been shown to be especially helpful for retail stores that want to manage their own liquidation of inventory but any small business can file Chapter 11 bankruptcy. In most cases, small business owners are better off filing for Chapter 13 due to the higher cost of a Chapter 11 bankruptcy. Chapter 11 bankruptcies typically take much longer to be approved as well. If you are a small business owner struggling with debt, you should meet with an experienced Dayton OH bankruptcy attorney to review your debt relief options and find out what is best for your situation.