Intro to Chapter 11 Business Reorganization: The Process, Time and Fees Involved

Many initial calls regarding a potential Chapter 11 business reorganization seek just the basic information: Does my business have to go out of business if it files bankruptcy? Can reorganization help my business resolve a particular debt or situation (i.e., unpaid withholding or sales taxes, judgments, collection efforts, commercial eviction, lawsuits)?  What is Chapter 11 anyway? How much does Chapter 11 cost? How long does it take for a plan to be confirmed?

At its most basic principle, Chapter 11 reorganization is a way that a financially distressed business can obtain immediate and lasting relief so that it can keep operating and stay in business. As the name “reorganization” suggests, that financial relief comes in the form of reorganizing and restructuring debts and other liabilities. A confirmed Chapter 11 plan of reorganization can accomplish this in any number of ways, from restructuring financing terms to extend the payback period, reduce interest rate and bifurcate secured claims (i.e., principal reduction), to discharging or significantly reducing unsecured claims, to providing a five-year payback period for most tax liabilities, to halting lawsuits and administrative actions, to reinstating a suspended license and more. The favorable results that can be attained in a confirmed Chapter 11 plan of reorganization are open ended and limited only by the parties involved.

The Chapter 11 process starts by consulting an attorney as soon as the business
finds itself in financial dire straits. Time is of the essence and non-bankruptcy options such as bank/creditor workouts or other out-of-court arrangements may be explored if time permits. However, Chapter 11s are often filed after such efforts fail or reach a standstill. At that point, the business can file Chapter 11 to obtain immediate relief in the form of the automatic stay prescribed under the Bankruptcy Code.  At the moment of filing, the automatic stay puts an immediate moratorium on debt collection efforts, including the suspension of pending lawsuits, judgments, foreclosure, levies, etc. While the automatic stay will not permanently deprive all creditors from pursuing their legal remedies, it often is the curveball that has that result. The automatic stay provides the debtor with breathing room and time to consider new routes to improve business prospects. Moreover, Chapter 11 offers a new platform upon which to leverage legal possibilities that may not be available outside of Chapter 11 bankruptcy.

Once filed, multiple parties become necessarily involved in a Chapter 11 proceeding. Of course there is the Chapter 11 debtor and its attorney, and also the Office of the US Trustee—which is a federal office organized under the U.S. Department of Justice—which has the duty to monitor and participate in Chapter 11 proceedings as necessary to ensure the procedural process and certain mandatory reporting requirements are properly followed. It is also possible that a committee of the business’s creditors may be formed however this is somewhat less likely to happen in smaller cases. Additionally, a bankruptcy judge is assigned to the case who serves as the ultimate arbitrator over the Chapter 11 proceeding and all disputes, if any, that may arise between the debtor and other parties in interest.

During the course of a Chapter 11 proceeding, the debtor can expect to make several appearances before the judge and with the attorney for the Office of the US Trustee assigned to the case. The debtor can also expect to prepare and file detailed monthly financial reports of the business’s operations, and to participate in negotiations with key creditors. Chapter 11 requires the business to be an “open book” for the duration of the proceeding, and transparency in most areas of the business is critical to a successful Chapter 11.

The duration of a Chapter 11 proceeding can vary widely, with a simple uncontested
case lasting a few months or more while a large business in an embattled case having multiple secured creditors and contested actions taking years to complete. An experienced Chapter 11 attorney can review the business’s circumstances, advise of the potential pitfalls that could arise to complicate a Chapter 11 proceeding, and provide an estimated range of attorney fees and other costs involved in Chapter 11 proceedings.

Lynn Wartchow provides initial Chapter 11 consultations to review the business
liabilities and other circumstances affecting a possible Chapter 11 bankruptcy proceeding, and to advise on possible options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects.

 

Chapter 13: Not Always a Gloomy Diagnosis in Bankruptcy

Inevitably, many people will be told they do not qualify for Chapter 7 and must do a Chapter 13 if they want to file bankruptcy. Often I am the person giving that advice to clients who simply do not have a Chapter 7 option due to their income level or other circumstances that steer them into Chapter 13. However, Chapter 13 is not the worst alternative and sometimes is actually the preferred form of bankruptcy under some circumstances, as is discussed in more detail below.

The first thing to understand is what a Chapter 13 actually means. Chapter 13 involves a monthly plan where payments are made to the Chapter 13 trustee for three to five years. The majority of these payments will be used to pay certain debts in their entirety (for example, some taxes, home mortgage arrears, etc.) and to pay down other debts in a fractional amount of what is owed. At the end of the plan and after making timely payments each month, whatever has not been paid down on “dischargeable debts” (i.e., those debts that would be discharged in Chapter 7), gets discharged in Chapter 13 as well. The net effect of Chapter 13 is usually that most debts will be discharged just as they would be in Chapter 7 however a fraction of what is owed gets paid back to your creditors from the monthly plan payments you make to the Chapter 13 trustee.

The second thing to consider is the monthly Chapter 13 payment, since you will be paying this for three to five years before you can receive a discharge. The amount of the Chapter 13 plan payment is a result of a multifactor calculation that considers your income and expenses to churn out a monthly payment that is reasonable for you to afford. A bankruptcy attorney can calculate what this amount will be for you and if there are any reasons why that amount may change up or down during the Chapter 13 plan. A Chapter 13 plan where the payment changes at some point is often called a “stepped-up” or “stepped-down” plan and is usually the result of known future increases/decreases in expenses such as when car payments ends or property taxes/insurance increase.

Next, consider the advantages of Chapter 13 and whether you can benefit from any of these. Most notably, Chapter 13 provides a way to repay home mortgage arrears 100% over the duration of the plan and regardless of whether the bank likes it or not. Of course, Chapter 13 debtors must continue to make their regular mortgage payments in addition to the Chapter 13 payment in order to stay out of foreclosure, but many mortgage companies are increasingly willing to work with people to modify the terms of their mortgage to make that regular monthly mortgage payment more practical in the long term. And in some situations, second mortgages that are fully “underwater” (that is, the amount of the first mortgage clearly exceeds the value of the home) can even be stripped off in their entirety from the home, leaving you with just your first mortgage. This second mortgage stripping is a recent development in Minnesota bankruptcy law that is thanks to the efforts of local attorneys working hard to ensure that bankruptcy offers real relief for debtors.

If Chapter 13 is your bankruptcy diagnosis, give it a second look and see if it there is a silver lining for you. If you ask the right questions, you may find out that Chapter 13 is an advantageous debt relief option.

Wartchow Law Office advises clients on which form of bankruptcy they qualify for and whether Chapter 7 or Chapter 13 fits their needs best. Contact for a free consultation and more information on options available under Chapter 13 bankruptcy.

While Bankruptcy Are Filings Down, Debts Are Still Up—Get Practical Bankruptcy Advice Sooner Rather than Later

According to the National Association of Consumer Bankruptcy Attorneys, the number of people filing for bankruptcy in 2011 has dropped as much as 30% in some states from 2010 to 2011. It speculates that the reason for the decline in bankruptcy filings may be due to the costs associated with filing bankruptcy, rather than an indication that people’s debts are becoming more manageable. In Minnesota, the court filing fee for Chapter 7 is $299 and the attorney fees in a typical Chapter 7 case can average $2,000 or more for a simple case. While bankruptcy attorneys should be especially busy in a downturned economy, their clients are scrambling to make mortgage payments and keep up with routine living expenses on less and less income, thus leaving little funds available for the expense of actually getting long term debt relief in bankruptcy.

However, the irony that bankruptcy is expensive shouldn’t prevent people from understanding the ramifications of debt and getting educated on their bankruptcy and non-bankruptcy options. Most bankruptcy attorneys offer free, no commitment consultations where they will review your circumstances and give you guidance and advice on how much bankruptcy will cost and how long it will take. The last thing most people want is to find themselves in the midst of a foreclosure, lawsuit or facing a wage garnishment and not having known there were options available to them to avoid that sticky situation, including filing for bankruptcy and sometimes options that don’t even involve bankruptcy. It never hurts to educate yourself especially if the only cost is a couple hours of your time.

Debts don’t go away fast, as we all know. Bankruptcy is your constitutional right to  relief from struggling under debt. Find out what bankruptcy can do for you and then decide if it makes sense.

Wartchow Law Office represents consumer and business bankruptcy clients in Chapter 7, Chapter 13 and Chapter 11 business reorganizations.

What makes a Chapter 11 Business Reorganization a “Work of Art”?

A Chapter 11 reorganization proceeding facilitates a business’s ability to actually stay in business. A successful Chapter 11 is a creative composition thoughtfully sculpted from the good will of a business, crafted by the Chapter 11 attorney into an effective masterpiece of productivity and often with the patronage of key creditors added as the finishing touch. While a work of legal art that revives a business into profitability and longevity is always the goal with Chapter 11 proceedings, it is not always the case. The statistics on successful Chapter 11 reorganizations are discouraging, with over half not making it to the point of a confirmed plan.

So what is it that differentiates a Chapter 11 statistic from a Chapter 11 success? How can you know if your business has what it takes to survive the bankruptcy process and reemerge as a profitable going concern? As a Chapter 11 attorney having represented various types of businesses in reorganization proceedings, I would say the essential element present in every successful reorganization is the business’s ability to survive “but-for” the events that created the downturned circumstances. Phrased differently, if the business has what it takes to survive this economy and pull positive cash flow if only certain issues were not part of the equation, then it may have what it takes to achieve a positive result in Chapter 11 reorganization.

First, identify the factors that are causing the business to ail. Most common ailments are provided varying levels of flexibility in Chapter 11: income and sales tax liabilities, lease problems and commercial eviction, a pending balloon payment on secured financing, unmanageable unsecured debts or monthly payments, judgments, even pending lawsuits and adverse administrative actions such as liquor license posting—all of these can be positively resolved in Chapter 11. However there are some issues that even the Rembrandt of bankruptcy attorneys cannot artfully compromise: a truly defunct business venture that cannot compete in any marketplace will probably not be resurrected even with the benefit of Chapter 11. Knowing what forms of relief are applicable under Chapter 11 for the different business conditions is the starting point from which a successful  reorganization proceeding can launch toward success. Achieving those goals during the course of the Chapter 11 proceeding and sanctifying the results in a confirmed plan of reorganization is the art form.

Ultimately, every business is dependent on a favorable market and no amount of artistry in Chapter 11 can create a market that does not exist. But if your business has a track record of good will and also the tools to move profitability into the future, Chapter 11 may be the silver lining in a dark cloud. Just like in the paintings of late-19th century realism that depicted the ferocity of nature, even the bleakest landscape has a glimmer of hope on the horizon.

Attorney Lynn Wartchow has represented Chapter 11 business reorganizations proceedings involving restaurants, bars, nightclubs and other businesses in Minneapolis since 2008.