Chapter 11 Bankruptcy Protection

A company may seek chapter 11 bankruptcy protection in order to reorganize the business and, hopefully, get a second chance of making a success. Individuals can also file for a chapter 11 bankruptcy when debts become overwhelming. However, filing for any type of bankruptcy is a step that should not be taken lightly. Every other avenue for bettering one's financial condition should be explored before taking this one. Though a fresh start may sound appealing, a bankruptcy can wreak havoc on a person's emotional well-being, a marriage, family relationships, and, of course, on the individual's credit history and FICO score. The complicated rules are governed by the United States Bankruptcy Code (USBC) and the Federal Rules of Bankruptcy Protection. This will seldom be a do-it-yourself legal proceeding as there are so many rules and guidelines that must be followed.

The chapter 11 bankruptcy protection may be either voluntary or involuntary. In a voluntary case, an individual, a married couple, or a business files for the protection on their own. In an involuntary situation, the creditors can petition the court. However, these creditors must meet certain requirements. It seems more likely that an involuntary situation would arise with a business than with an individual. The business's creditors may realize that there are financial difficulties at the company. By joining together, the creditors may be able to force the company to reorganize before the economic matters get even worse. However, the complex laws governing these situations will need to be carefully followed every step of the way. The cost of filing for protection is not cheap. As provided in the USBC, the court filing fee for chapter 11 bankruptcy protection is $1,000. There is also a $39 administrative fee.

It's very sad when individuals and families get into situations where they face possible bankruptcy. Some people find themselves in this type of situation because of poor financial decisions or a tendency to overspend. Others may be forced into a chapter 11 bankruptcy protection situation because of high medical bills or other financial obligations that have spiraled beyond control. In today's economic climate, many families are facing difficulties because of increased monthly mortgage payments to rising adjustable rate mortgages. Perhaps these individuals made a poor financial decision by agreeing to an adjustable rate mortgage, but now they are in a situation that is causing heartbreak. Other families are finding that their homes have decreased in value to such an extent that they are caught with an upside down mortgage. For any or all of these reasons, individuals may choose to seek chapter 11 bankruptcy protection in order to conserve some assets. An Old Testament writer recorded this small prayer: "Two things have I required of thee; deny me them not before I die: Remove far from me vanity and lies: give me neither poverty nor riches; feed me with food convenient for me: Lest I be full, and deny thee, and say, Who is the LORD? or lest I be poor, and steal, and take the name of my God in vain" (Proverbs 30:7-9). Wisdom appears to favor this middle ground.

But for those who are already caught in the clutches of debt may need to give serious consideration to applying for chapter 11 bankruptcy protection. As part of the process, the court requires specific documents in addition to the court costs and filing fee. For example, an individual or married couple needs to provide a certificate from an approved credit counseling agency that indicates the agency provided credit counseling within 180 days of filing for the protection. The court also requires a copy of any debt repayment plan that was created as part of the credit counseling process. In addition, the court requires specific economic information. The individual or couple needs to provide at least the following: a listing of all assets and liabilities; current income and expenditures; a schedule of any financial contracts; a schedule of any unexpired leases (for example, on a vehicle or equipment); and a statement of financial affairs. The court may also ask for information about future increases in income. The trustee monitors the individual's progress throughout the process and may impose requirements for the debtor to meet.

A business that seeks chapter 11 bankruptcy protection will also need to provide the court with all required and requested economic documentation. If the business is a sole proprietorship or a partnership, the owners' personal assets may be at risk. The court trustee may require that the personal assets be used to meet the company's liabilities. Personal assets are seldom an issue when the business is a corporation. If the business is publicly traded on the stock market, the Securities and Exchange Commission (SEC) has an interest in any bankruptcy proceedings. Such companies are required to file a form with the SEC and to continue filing all required reports regarding the company's securities. In chapter 11 bankruptcy protection, the company's management is usually allowed to continue with the day to day operation, but significant business decisions are made by the court. Typically, creditors fall into three categories. When it comes to repaying obligations, the creditors who have secured loans are first in line. Unsecured creditors are next. Often, a creditors committee of the largest unsecured creditors will be set up to oversee the bankrupted company's operations. Third are the shareholders. They may never get back their investment as the existing shares may be canceled as part of the reorganization process.

Chapter 11 Bankruptcy Procedures

When a commercial entity is suffering from debilitating debt, but believes there is a way to recover and become profitable again, a Chapter 11 bankruptcy may be an option for consideration. Chapter 11 bankruptcy procedures allow businesses to restructure or reorganize their debt and continue to operate without the heavy burden of past due bills and pressing obligations. But, when filing this legal maneuver, debtors are subject to court supervision.

When businesses consider filing for Chapter 11 bankruptcy, they will need to know that a financial plan has to be submitted to the court overseeing the processes. Not only will the court have to approve the financial plan submitted, but it will also be involved in all major financial decisions throughout the bankruptcy. The court appoints a trustee and forms committees that will be help guide the company in accomplishing the goals and time lines set forth by the different committees. The final financial plan that is constructed by the trustee, the company and its shareholders, and those that make up the committees is also subject to approval by the creditors.

Because Chapter 11 bankruptcy procedures allow for companies to continue to operate, even selling and trading stocks, during the restructuring period, this filing is used by most publicly held businesses that are experiencing detrimental financial woes. A chapter 11 bankruptcy allows the managers and stock holders to keep some control over the day to day business transactions. With a new financial plan and more freedom to accomplish the business at hand, companies in Chapter 11 have a good chance of regaining strength and turning their financial statements into positive documents.

During the restructuring process, the company in question may find it difficult to obtain credit or to negotiate future business dealings. Because of this limitation, often the court and various committees involved will place orders for new creditors to receive priority in payments. This will encourage other businesses to extend credit based on the security offered by the court and restructuring. The order of payment priorities are generally: new creditors, goods and service suppliers, then stock holders. However, the court makes the final decision on what creditors receive payments and in what order of precedence.

The time line for Chapter 11 Bankruptcy procedures can vary. The size of the business filing a Chapter 11 Bankruptcy can determine the amount of time involved. Large companies with complex financial dealings could take several years to reorganize. Smaller businesses have restructured and emerged profitable again in just a few months. In some cases, companies are not able to restructure and these companies ultimately liquidate their assets.

Finding a good bankruptcy lawyer will be crucial for the entire process. A lawyer should be informative and available, helping his or her client understand the legal acts taking place. Bankruptcy attorneys can be expensive and they will receive priority in payment during the Chapter 11 Bankruptcy procedures. Businesses struggling should speak with several law firms that specialize in bankruptcy laws before determining which law firm or attorney will work best with their individual financial picture.

Before filing for legal restructuring, businesses might want to consider alternatives for reorganizing. The new Bankruptcy Reform Act initiated by Congress mandates that individuals and businesses obtain credit counseling before filing for any chapter. Now, companies may want to initiate this incentive before obtaining a lawyer. Finding alternatives to a legal filing could be less expensive, less troublesome, and less damaging to reputations and credit reports. Though much of the stigma associated with a filing no longer exists, there are still consequences.

The Bible teaches individuals and businesses alike to seek godly counsel on important issues. Perhaps the Lord knows that when we attempt to control circumstances on our own, we often fail. When a business is struggling under the weight of heavy debt, seeking the counsel of professionals and other experienced business people can be wise. In business dealings, it will be tempting to take advise that may not be honorable, so seek the wisdom of Christian business leaders who put God's direction as a priority in their counsel. "Where no counsel is, the people fall: but in the multitude of counsellors, there is safety." (Proverbs 11:14) Also, carefully pray over all decisions about the company's financial future. "Only by pride cometh contention: but with the well advised is wisdom." (Proverbs 13:10)

A Chapter 11 bankruptcy filing is not always determined by the owner or owners of a business. In some cases the creditors may force a company to file. Filing a Chapter 11 is the best option to consider after all other avenues of reorganization have been exhausted. This filing will allow employees to keep their jobs and holds promise for future growth to the benefit of employees and stockholders. For more information on laws concerning Chapter 11 bankruptcy procedures, browse the Internet where various organizations explain the entire process involved.





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