Succeeding with a Chapter 11 business bankruptcy

Succeeding with a Chapter 11 Business Bankruptcy

 

When a business is facing financial difficulties, rather than allowing the business to shutdown, business managers often determine that it is in the business’s best interest to seek protection with the Arizona Bankruptcy Court under Chapter 11 of the U.S. Bankruptcy Code.  A Chapter 11 business bankruptcy filing will temporarily stay creditors’ enforcement actions against the business (debtor) and may allow the debtor to reorganize its debts in a way that will allow continued operations.

Chapter 11 Business Bankruptcy Filing

The typical goal of a Chapter 11 business bankruptcy is a “fresh start” through the Bankruptcy Court confirming the debtor’s plan of reorganization.  For the Court to confirm a Chapter 11 plan of reorganization, the debtor must satisfy requirements set forth in the Bankruptcy Code and the Bankruptcy Rules of Procedure.  Since there are relatively few requirements regarding the specific terms of a plan of reorganization, there is ample opportunity for creativity in crafting a plan that will satisfy creditors and maximize the reorganized debtor’s ability to succeed.  While many Chapter 11 debtors are able to confirm a plan of reorganization with the negotiated consent of their creditors, there are Chapter 11 cases where a plan cannot be confirmed without conducting a plan confirmation trial.

The Bankruptcy Code establishes requirements to test the feasibility of the debtor’s plan and fairness of the plan to creditors and other parties in interest.  Often, creditors or other parties in interest will assert that the debtor has not met the requirements for the Court to confirm the debtor’s plan.  Fortunately, debtors have many tools at their disposal to help them through the process toward confirming a plan, including the ability to: seek new financing, bring in new equity holders, sell assets, reject leases, cramdown the amount and interest rate on certain debts, and strip liens that encumber the Debtor’s assets.

Having represented numerous debtors and creditors in Chapter 11 business bankruptcy cases, there is something that a debtor can do to greatly increase its chances of success: as soon as possible (and preferably before initiating the bankruptcy case), formulate a strategy for how the debtor will exit bankruptcy.  Often, bankruptcy filings are caused by a sudden event that makes pre-bankruptcy strategy difficult, however, as soon as possible, a debtor should focus on how it will confirm a plan and close its bankruptcy case.

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