Recognize the Circumstances that Often Lead to Chapter 11

The factors commonly precipitating a Chapter 11 business proceeding are numerous: lawsuits filed by unsecured creditors, reluctance of secured lenders to extend or continue financing terms, attachment of business assets including bank account levies, foreclosure or repossession of key assets used in business, adverse administrative actions such as license posting by the state, aggressive tax collection, a commercial eviction proceeding and the list goes on.

Businesses are often cyclical in their financial condition, and experience financial highs and lows the same as individuals. Not every ailment justifies the time and expense of a Chapter 11 business proceeding, and an experienced and principled Chapter 11 attorney can advise if that is the case for your business. Sometimes, however, a situation that warrants Chapter 11 is a “one-off” of sorts: an unexpected lawsuit or judgment brought against the business, an isolated but escalating event such as an eviction proceeding or sales tax audit, or a recurring temporary circumstance that the business just  can’t get out from under.  In situations such as these, the expense of a Chapter 11 may be justified since it provides both immediate relief and a permanent solution.

Chapter 11 opens the door to new avenues of relief that are not available outside of the context of bankruptcy. As a simple yet common example to many small businesses, the nonpayment of sales tax can effectively put a business out of business in as little as a few months. The Minnesota Department of Revenue, charged with collecting revenue to offset the State’s huge deficit, is necessarily aggressive in the collection of sales tax and provides extremely little, if any, breathing room for businesses that cannot immediately pay delinquent tax obligations. Unpaid sales tax quickly threatens any business. Outside of bankruptcy, unpaid sales tax can result in license posting and a revocation of sales tax permit that is tantamount to the death of operations, as well as the pursuit of personal liability against principals of the business. Inside Chapter 11, by contrast, unpaid sales or withholding taxes can be statutorily repaid over five years at low interest, and often personal collection is put on hold while the business reemerges under a confirmed Chapter 11 plan.

Keep reading for more information about Sales Tax Obligations and Chapter 11 Reorganization and Commercial Leases and Chapter 11 Reorganization: The Requirements and Timelines under the Bankruptcy Code.

Read some of the recent Chapter 11 success stories handled by Wartchow Law Office.

Lynn Wartchow is a Chapter 11 attorney located in Edina, MN. Contact Wartchow Law Office for an initial Chapter 11 consultation to review business liabilities and other circumstances affecting a Chapter 11 bankruptcy proceeding, and for guidance on options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects. 

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