Understanding Chapter 11 bankruptcy

On Behalf of | Mar 14, 2018 | Chapter 11

At the Grafstein & Arcaro, LLC in Connecticut, we know that creating and running your own business is your “American Dream.” Sadly, however, statistics show that most business start-ups fail. If yours faces overwhelming debt, you undoubtedly have numerous questions about what a small business Chapter 11 bankruptcy entails and what happens to the debts your business accumulated. Are you held liable for them?

As FindLaw explains, your company qualifies for a small business Chapter 11 bankruptcy if you have 500 or fewer employees and no more than $2.19 million in debts. The whole purpose of a Chapter 11 is to make your business profitable. Consequently, the first thing you do after filing for Chapter 11 is to renegotiate your company’s contracts and leases so as to obtain more favorable terms and/or reduce the amount of its outstanding debt.

Then you have 180 days in which to set up a plan to reorganize your company so as to repay some of its debts and discharge the others. During this time your company’s creditors cannot attempt to collect their debts. They must vote on and approve your plan before it goes to the bankruptcy judge for approval. Judges normally approve all plans that are devised in good faith, reasonable, and comply with the law.

Creditor classifications

Your company’s creditors fall into the following three categories:

  1. High-priority creditors: federal and state tax agencies, stockholders who have invested in your company, and employees to whom your company owes back wages
  2. Secured creditors: creditors with some form of collateral securing their debts
  3. Unsecured creditors: creditors whose debts have no collateral to back them

Each high-priority and secured creditor is in its own respective class. Your company’s unsecured creditors get lumped together into one class. Under your plan, you negotiate with each of your high-priority and secured creditors and negotiate with your unsecured creditors as a group.

Discharge and/or repayment

After the judge confirms your company’s reorganization plan, you and your company conduct business as usual. Any company debts not addressed by your plan are discharged, and your company begins repaying the others according to the plan. For further information on this subject, please see this page of our website.