In the face of insurmountable debt you have made the decision to declare bankruptcy. It should be a knockout blow. But, fully comprehending the mistakes made in managing debt, you have decided to get up again and pull your company through the crisis. Make certain you have in your corner, a lawyer seasoned in bankruptcy law. Here is what you can expect as your chapter 11 process unfolds.
Declaring Chapter 11
You begin by filing for a chapter 11 bankruptcy which allows you to keep the business open. Within a few weeks a member of the U.S. Trustee office will review the records and documents and will certify that they are in order. Note that the person is not acting in the role of a “trustee” at this point. You are required to close all existing bank accounts. You will operate one type of account only, as what the law terms a “debtor in possession.” The accounts provide for the payment of new obligations going forward.
Once your contact at the US Trustee decides the paperwork is in order, you and your attorney will attend a meeting of creditors, which is the first official step in the process. At this point an attorney from the U.S. Trustee office gets involved. The hearing is usually a simple meeting that is conducted in a conference room. In many cases no creditor actually attends the meeting. From this point forward you would have a requirement to file monthly operating reports and pay fees to the U.S. Trustee.
Shortly after you file for bankruptcy, you will meet with a judge in what is called a “status conference.” The judge will require a brief outline of your reorganization, demonstrating how you will reform the way the company operates. The plan need not be thorough at this point. The court will set a time for submission of a more formal reorganization plan. From the get-go, you will want to give the judge a sense of what you have learned about debt. Acknowledge past mistakes made and convey your commitment to managing debt in the future.
After the status conference, you will need to file with the court a more comprehensive plan demonstrating how your reorganization will actually fix the core problem(s) that led to bankruptcy. The plan must include a repayment schedule for outstanding debt.
- Priority claims, like payroll taxes, need to be repaid within 5 years.
- Unsecured creditors (vendors, etc.) don’t need to be paid 100%, but if you want to remain the owner of the company that emerges from bankruptcy, you need to be aware that creditors can band together and demand a higher % of payback than you might otherwise be able to negotiate.
- Ranking classes of debt determine the priority of repayment. Secured creditors rank first. 2nd: IRS / payroll taxes. 3rd: employees who haven’t been paid in the time leading up to when bankruptcy was declared. 4th: unsecured creditors. Last: owners.
- Each class gets to vote on your plan and you need to convince at least one of the classes, who will not be repaid 100%, to accept the plan. You need at least half in number and 2/3rd in total debt value to accept the plan.
- Creditors within each class must be treated alike. For example, you cannot pay some employees but not pay others.
- While in bankruptcy you are required to pay a quarterly fee to the Office of the U.S. Trustee. The fee is calculated based upon disbursements made (often the fee is in the range of $650 – $1,000 per quarter.
After gaining support from enough creditors the case moves to a confirmation hearing. The final plan must, in the opinion of the court, be in compliance with the Bankruptcy Code. If the viability of the plan is in doubt you may be forced into chapter 7.
If your bankruptcy case is open long enough, you may need to file taxes.
The process is riddled with deadlines. You will face a barrage of motions from creditors who want to be paid. Some will submit alternative plans to oppose your recovery strategy. Clear and honest communication with the court, with your lawyer, with employees and with your creditors, is key to a timely and successful outcome.