A business may very well be viable and still go bankrupt for a variety of reasons that don’t necessarily have to do with the owner or their decisions. In such cases, dissolving the business and distributing its assets between the creditors might not be the best move. Luckily, there are legal options you can take that don’t involve closing down the business you’ve worked on for years, or surrendering it to a third party.
Chapter 11 and Chapter 13 of the US Bankruptcy Law regulate what is known as “reorganization bankruptcy”, which allows a company to stay in business, most often under the stewardship of its owner or representative, while paying its debts over a number of years.
Although they address different circumstances, Chapter 11 and 13 share a number of similarities. They both let you modify payment terms during the proceedings and any other payment obligations you might have are automatically postponed or cancelled. Despite their similar benefits, there are also some key differences that might make one preferable over the other for business owners.
What Should You Know about Chapter 13?
Chapter 13 is the cheaper, less complicated, and generally faster of the two, but the requirements to qualify are suitably strict. Only individuals and sole proprietors may apply, and in each instance, they need to earn a steady income. In the latter case, this is justified by the fact that as a sole proprietor, your assets are tied to the company, which is understood by the court as an extension of your person.
Since Chapter 13 only involves a payment plan and sometimes restructuring, creditors don’t have the right to seize any of your possessions. This means your house will be safe from foreclosure.
Downsides of Chapter 13
The court will decide how much you will have to pay back at regular intervals, depending on the value of your total assets, on whether your income is above or below the state average, and on the outstanding amount owed. This outstanding debt can’t be more than $1,184,200 and $394,725 for secured and unsecured debt, respectively, to qualify for Chapter 13.
A trustee is appointed by the court to supervise the repayment process, which can take anywhere from three to five years. It is important to note that courts want the proceedings to go as fast as possible, and this might mean that the entirety of the debtor’s steady income could go the way of the creditors. So carefully consider all alternative ways you have for supporting yourself before you decide to file under 13.
Chapter 11 Gives You More Freedom
In most cases, there’s no appointee supervising repayment with Chapter 11, although you can be brought before the court at any time by creditors for justifying expenses or if the restructuring plan isn’t followed closely enough.
In normal circumstances, Chapter 11 will allow you to run your business as usual under the title of “debtor-in-possession”, but some changes will naturally have to be made in order to meet with your creditor’s requirements. These can include everything from cutting expenses to liquidating company assets and closing whole branches of the company.
After filing for 11, you will need to formulate a restructuring plan detailing all these measures and send it to both the creditor and the court for their approval, together with all relevant information regarding your company’s financial situation. This is arguably the most important part of the process and generally entails heavy negotiations. Bankruptcy attorney Kevin S. Neiman has this to say:
“At a very generalized level, the debtor’s usual goal in a Chapter 11 case is to confirm a plan of reorganization, or in other words, to secure the creditor’s vote on the changes he proposes to enact. This is the most delicate part of the proceedings, as the interests of the debtor and creditor almost always conflict. It’s not unusual for both parties to get caught in back and forths for more than a year, as creditors often don’t feel their requirements are adequately met, and the debtor isn’t comfortable to significantly alter the way he conducts business.”
Negatives of Chapter 11
Chapter 11 can also be filed by creditors, in which case, formulating a restructuring plan will fall under their purview. While you will still be allowed to object to certain provisions, this does take away from your room to maneuver. According to the official site of the US courts system, judges will usually consider the interests of the creditor above those of the debtor, as the latter is considered at fault for taking a credit they can’t otherwise fulfill.
There is also a $1,167 case filing fee and a $550 administrative one, which might not sound like much until you consider that people who would have to pay it are already deep in debt. General legal costs associated with the proceedings are considered to be relatively high as well, and the whole process can last up to 20 years.
Benefits of Chapter 11
Basically, everyone can apply for Chapter 11 bankruptcy, although ordinary salarymen and even small business owners would be better served by Chapter 13.
Chapter 11 also allows you to retain a high degree of control over your business and assets, at least after the painful negotiation process is over (we can’t stress enough how important the council of a good lawyer is at this stage), which often translates to control over your income. Don’t imagine you won’t have to tighten the belt, but unlike some cases with Chapter 13, you will be the one primarily deciding by how much.
In as much, some positive benefit could be derived from bankruptcy. People may find that being caught in one could amount to a learning experience, and they could come out of it with improved finance-managing abilities and a new understanding of how the legal system operates.