Chapter 11 allows “reorganization” of a corporation under the US laws for bankruptcy. In this context, reorganization means preparing a plan that ensures that the business is not shut down and at the same time creditors get paid over a period of time.
All types of businesses, corporations, sole proprietorships and joint ventures can file for this type of bankruptcy; but mostly it is used by corporations. Mountings debts and increasing inability to pay them back despite trying all means, leaves the corporation with just one option i.e. declaring bankruptcy. When in such a situation and when no other option seems to work, a business can declare bankruptcy under chapter 11.
Here are the steps to follow for filing chapter 11 bankruptcy:
1. Knowing the differences in the bankruptcy chapters is a pre-requisite to filing for chapter 11 bankruptcy. Chapter 11 offers you a possibility to carry on with your business while you develop a payment schedule to pay back your creditors with assistance from the bank. Individuals having their own business can also file for chapter 11 bankruptcy.
2. After you have understood the bankruptcy chapters (eligibility conditions and other rules), hire a lawyer who can help you through the complicated legal process of bankruptcy. There are lawyers that have qualifications specific to the bankruptcy chapters. Hiring a chapter 11 bankruptcy lawyer will be beneficial for you and your business. Besides ensuring a strong case, a lawyer will also help you save a lot of time.
3. If you fail to comply with the court’s order or do not show up for the hearing, the court will not allow you to again file for chapter 11 bankruptcy (or any type of bankruptcy) for a period of 180 days. Besides this, there are other criterion that you must fulfill e.g. you must have received credit counseling during the period of 180 days preceding your filing.
4. All your important documents need to be in place when you file bankruptcy and are going through the legal process. List down your assets and liabilities along with your income, expenditure and other financial statements. All this needs to be done within 15 days of filing chapter 11 bankruptcy. If you are filing for chapter 11 bankruptcy as an individual, you will also have to produce the proof for credit counseling. All the required forms can be downloaded from the government website (https://www.uscourts.gov/forms/bankruptcy-forms).
5. When you have declared yourself bankrupt, you should meet your creditors. This is necessary from the point of view of scheduling the payments. During the first four months, you are required to file your plan. The plan, of course, has to satisfy certain legal criterion. The creditors should be in agreement with the plan. In case no agreement is reached on the plan, the courts would mediate.
6. After your meeting with the creditors goes on successfully, you will have to get ready for IRS. This is because the government is mostly a part of your creditors and a number of bankruptcy laws deal with payment of taxes. All this is included in the settlement plan. You will have to abide by the laws and fulfill all the formalities that the government wants you to. Only then you will be able to get rid of the debts in an easy manner. Your lawyer will help you in the process and will make sure that you do not come across any issues related to paying back taxes.
7. The last thing is giving up control on your assets. If you have filed your bankruptcy under chapter 11 of the bankruptcy code and the repayment plans don’t work out then you might have to give up control on your assets. So, the government and your creditors will take possession of your assets and run your business in a way that they want to (or liquidate). You will have to abide by what they wish to do.
However, filing for chapter 11 bankruptcy should not be considered an option unless everything else has failed. You should first try and talk to the creditors and ask if they can give you some time to pay back the loans. If they disagree and you do not have any other option left, bankruptcy can always help you out of this messy situation.