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Chapter 11 bankruptcy is a business restructuring

On Behalf of | Apr 30, 2024 | Bankruptcy

The U.S. Bureau of Labor Statistics reveals that roughly 25% of American businesses don’t survive their first year. Those that make it past their first year face increasingly more daunting odds of success, reaching a 65% chance of failure after ten years. In Ohio, those numbers are slightly lower, with a 23.8% failure rate in the first year and 61% after 10. These numbers translate into millions of businesses nationally and thousands here in Ohio.

The reasons for not making it will vary but generally involve bad luck, inflation and lack of capital. These issues can even sidetrack businesses where customers are lining up to buy goods and services. Rather than file Chapter 7 and liquidate all assets in an attempt to satisfy debts, the solution may be a matter of too much debt but the otherwise successful business needs to restructure by filing Chapter 11.

What is Chapter 11?

Chapter 11 bankruptcy offers a chance to reorganize and reset its financial course. This process isn’t about closing a business; it’s about providing a fresh start and a strategy to stay afloat in the competitive market. Filing for Chapter 11 can seem daunting, but it comes with several benefits:

  • It allows businesses to continue operations while restructuring debt.
  • Unlike in other bankruptcy forms, the company’s management usually remains in charge.
  • Businesses may obtain new lines of credit with court approval.
  • Companies can renegotiate terms with lessors and contractors for more favorable conditions.
  • Businesses can propose their repayment plans to creditors, allowing for flexible solutions.

How It Works

Embarking on the Chapter 11 process is a structured affair:

  1. Filing the petition: The business or its creditors can file a petition for Chapter 11 in a bankruptcy court.
  2. Automatic stay: This immediately stops most collection actions against the debtor or its property.
  3. Developing a plan: The company works on a reorganization plan to repay creditors over time.
  4. Disclosure statement: A written document gives creditors the necessary information to evaluate the plan.
  5. Creditor voting: Creditors with a stake in the outcome vote on whether to accept the reorganization plan.
  6. Court approval: If the plan is fair and feasible, the court confirms it.
  7. Implementation: The business begins to operate according to the plan, paying debts under the new terms.

The Road to Renewal

While no business sets sail hoping to encounter financial distress, Chapter 11 offers a chance to reorganize debts, keep the doors open, and protect jobs. For companies facing tough economic times, Chapter 11 can be the solution that provides the key to future success.