How Chapter 11 Bankruptcy Works

When your company files for bankruptcy, it will receive immediate protection from collection actions as a result of the automatic stay. This court order prevents creditors from initiating or continuing collection lawsuits, payment requests, levies, property seizures, foreclosures, or any other collection actions. The automatic stay will generally remain in effect for the duration of the reorganization process, and creditors will need special permission from the bankruptcy court to take any type of action.

Unlike other types of bankruptcy, business owners will remain in control of the company and its assets once their petition has been filed. The business owners will be able to continue to run the business, and in most cases, the company will be able to proceed with normal operations. However, the bankruptcy court will have decision-making authority and veto power over many types of business decisions for the duration of the case.

In a typical Chapter 11 bankruptcy, the business owners will need to prepare a thorough disclosure statement that documents the company’s current financial circumstances. This statement must be carefully and accurately prepared, as it will be heavily scrutinized by both the court and the business’s creditors. Creditors have the right to object to the validity of the disclosure statement, which can trigger expensive litigation.

You will next have to propose a reorganization plan that addresses your outstanding debts, liabilities, and assets. The specifics of your plan will depend on your unique circumstances. You might aim to modify loan agreements and discharge certain types of debt, for example. 

In most cases, you will have a four-month exclusivity window to submit a plan without input from your creditors. After this window has passed, your creditors have the right to submit counterproposals that will likely not be in your company’s best interest. 

Keep in mind that both the bankruptcy court and your creditors will have to approve the proposed plan. If creditors object to your plan, the bankruptcy court does have the power to overrule them if certain conditions are met.

Chapter 11 plans will be evaluated on the basis of:

• Feasibility. The financials contained in your disclosure statement must support the goals of your plan.
• Good Faith. Your business must make every effort to do right by its creditors.
• The Best Interest of Creditors. To meet this condition, you must demonstrate that your plan will provide creditors with at least as much as what they would receive if you instead pursued a Chapter 7 bankruptcy liquidation.
• Fairness and Equitability. Under your plan, secured creditors must be eventually paid the value of their collateral at the bare minimum. Filers also cannot keep property based on equity unless the associated debts are paid in full.

Our West Los Angeles Chapter 11 bankruptcy attorney can help your business prepare a plan that provides you with the relief you need. We can also field objections from creditors and work to overcome any other obstacles that may arise.