Have You Decided That Your Business Must Declare Bankruptcy?

If your North Carolina business owes more than it can pay, you may be able to save the business, but you will have to move forward cautiously, and you will need the insights and advice that a North Carolina Chapter 11 bankruptcy attorney can provide.

Throughout the nation, business bankruptcies are increasing. Businesses, including scores of businesses in North Carolina, filed more than 18,000 bankruptcies in the United States in 2023.

However, a bankruptcy filing can have serious negative consequences for your business, and you may have other, better options. Before your business files for bankruptcy, schedule a consultation to discuss those options with a North Carolina Chapter 11 bankruptcy lawyer.

If bankruptcy is your only practical alternative, you and your lawyer may decide to file a Chapter 7, Chapter 11, or Chapter 13 bankruptcy. Chapters 7, 11, and 13 are chapters in the U.S. Bankruptcy Code, the federal laws governing bankruptcy in the United States.

What Type of Bankruptcy Should You Choose?

A Chapter 7 business bankruptcy will shut down your business. You will be required to liquidate the assets of your business in order to pay as much as possible of what the business owes to its creditors.

Personal consumer debt bankruptcies are usually filed as Chapter 7 or Chapter 13 bankruptcies, but a Chapter 13 bankruptcy can also be filed for a sole proprietorship. This type of bankruptcy can reduce your debt and reorganize it for monthly payments your sole proprietorship can afford.

Usually, however, the best choice for a business bankruptcy is a Chapter 11 bankruptcy, which also lets you reorganize your operation and remain in business. Typically, Chapter 11 is used by businesses that have accumulated debt over the maximum debt limit for Chapter 13 bankruptcies.

Business Bankruptcies Chapter 11

Chapter 11 bankruptcy is a complex legal process governed by the United States Bankruptcy Code, designed to help businesses restructure their debts and operations while continuing to operate. This form of bankruptcy is often referred to as a “reorganization” bankruptcy because it allows the business to develop a bankruptcy plan that reorganizes its financial affairs, aiming to return to profitability.

One of the key advantages of Chapter 11 is that the business owner, known as the debtor in possession, retains control over the company’s assets and business operations during the bankruptcy case. This control is subject to court approval, ensuring that any significant decisions, such as selling major assets or entering into new contracts, are in the best interests of creditors and other stakeholders.

Chapter 11 also provides protection through an automatic stay, which halts most collection actions by creditors, giving the business breathing room to formulate and implement a reorganization plan. The plan must be approved by the bankruptcy court after a confirmation hearing, where creditors and other parties can object or accept the proposed plan.

For small businesses, the Small Business Reorganization Act (SBRA) offers a streamlined Chapter 11 process under Subchapter V, which reduces some procedural burdens and accelerates the timeline for confirmation. This option is available to eligible small business debtors and is intended to make Chapter 11 more accessible and cost-effective for smaller enterprises.

In summary, choosing the right type of bankruptcy depends on your business structure, debt levels, and long-term goals. While Chapter 7 results in liquidation, and Chapter 13 suits certain individuals and sole proprietors, Chapter 11 offers a path for many businesses to reorganize, protect their assets, and continue operating under the supervision of the bankruptcy court and bankruptcy laws.

What Happens When a Business Files a Chapter 11 Bankruptcy?

Chapter 11 bankruptcies are most frequently filed by partnerships and corporations, but a sole proprietorship may also file for a Chapter 11 bankruptcy. The chief aim of a Chapter 11 bankruptcy is to maintain a viable business entity by reorganizing the company’s owners debt structure.

When a business files for bankruptcy under Chapter 11, the court issues an automatic stay that prevents creditors from harassing you or taking action against your business during the bankruptcy process. During that process, you’ll need the bankruptcy court’s consent to sell assets (except for inventory), to agree to or terminate a lease, or to expand or halt business operations.

Also during that process, the bankruptcy court decides when and if your business may enter into a contract with a union or a vendor, and the business may not arrange to obtain a loan that will begin after the bankruptcy process concludes.

How Does Chapter 11 Reorganization Work?

As a business owner filing a Chapter 11 bankruptcy, you will have the opportunity to propose a debt reorganization plan that must be approved by the bankruptcy court. Such a debt repayment plan may include the renegotiation of your unsecured debts or downsizing your operations in order to reduce your costs.

In some cases, your financial reorganization plan may involve the liquidation of business assets in order to pay creditors. If your proposed debt reorganization plan is deemed fair and feasible, the bankruptcy court will approve it, and the bankruptcy will proceed.

Allowing a business to continue its operations lets the business generate cash flow that helps with the repayment process. The bankruptcy court also issues an automatic stay that prevents creditors from harassing you or taking collection actions during the bankruptcy process.

During the Chapter 11 process, the debtor remains in possession of the business assets, which means you retain control over the company’s operations while working through the reorganization. This status as debtor in possession comes with fiduciary duties to the bankruptcy estate and requires you to act in the best interests of the creditors and other parties involved.

Your reorganization plan must provide an informed judgment to the bankruptcy court and creditors by including a detailed disclosure statement outlining your business’s financial affairs, assets, liabilities, and the proposed treatment of claims. Creditors, including unsecured creditors and secured creditors, have the opportunity to review this information and vote on the plan.

The bankruptcy code requires that the plan treat at least one class of impaired creditors fairly and equitably. Impaired classes are those whose legal rights are altered under the plan, such as receiving less than full payment. The court will hold a confirmation hearing to ensure the plan does not discriminate unfairly among creditor classes and that it is proposed in good faith.

Throughout the case, a creditors committee may be appointed to represent the interests of unsecured creditors. This committee consults with the debtor, investigates the debtor’s conduct and business operations, and participates in the formulation of the reorganization plan.

The debtor must also comply with various reporting requirements, including submitting monthly operating reports and maintaining separate bank accounts for the bankruptcy estate, as required by state law and the bankruptcy code. Failure to comply can result in dismissal or conversion of the case.

Furthermore, the automatic stay protects the business from most litigation and collection actions, providing the necessary breathing room to restructure without interference from creditors. However, secured parties may seek relief from the stay if adequate protection is not provided.

While Chapter 11 allows a business to continue operating, the process can be complex and costly due to filing fees, legal expenses, and administrative costs. The exclusivity period initially grants only the debtor the right to file a plan, which may be extended or shortened by the court, but after this period, other parties may file competing plans.

In summary, Chapter 11 bankruptcy offers a structured path for struggling financially businesses to reorganize their debts, negotiate with the company’s creditors, and emerge with a viable business model, all under the supervision and approval of the bankruptcy court and in accordance with the United States Bankruptcy Code.

What Else Should You Know About Chapter 11 Bankruptcy?

Most creditors will cooperate with a Chapter 11 reorganization plan because they are more likely to be paid than if your company simply goes out of business. However, business owners need to understand that a Chapter 11 bankruptcy is quite complicated and time-consuming.

Thus, business owners in North Carolina should consider a Chapter 11 bankruptcy only after they have discussed their alternatives with a North Carolina Chapter 11 bankruptcy attorney.

Reorganization Plan

A Chapter 11 bankruptcy involves disclosures, audits, hearings, and more. Merely preparing a debt reorganization plan may take months. The law imposes no time limit for completing a Chapter 11 repayment plan, but for most companies, it will take from six months to two years.

During the Chapter 11 process, the business becomes a debtor in possession, retaining control over its assets and continuing to operate under the supervision of the bankruptcy court. This status allows the business to manage its daily operations in the ordinary course of business while developing a feasible reorganization plan.

The bankruptcy court requires the debtor to submit a disclosure statement, which provides creditors and other parties with sufficient information to make an informed judgment about the proposed plan. Creditors whose rights are affected by the plan, especially unsecured creditors, have the opportunity to vote on its acceptance.

Throughout the case, the automatic stay protects the business by halting most collection efforts and lawsuits, giving the company breathing room to focus on its financial reorganization. However, secured creditors or other parties may seek relief from the stay under certain circumstances, such as gross mismanagement or failure to comply with court orders.

Additionally, the debtor must comply with various reporting requirements, including filing monthly operating reports and maintaining separate bank accounts for the bankruptcy estate. The bankruptcy code requires strict adherence to these rules to ensure transparency and protect the interests of all creditors.

It is important to note that while Chapter 11 allows a business to continue operating and reorganize its debts, the process can be expensive due to filing fees, legal costs, and administrative expenses. Moreover, the debtor’s business might face challenges such as impaired classes of creditors and the need to negotiate executory contracts and unexpired leases.

Finally, the exclusivity period grants only the debtor the right to file a plan initially, but this period may be extended or shortened by the court. The plan must not discriminate unfairly against any class of creditors and must be confirmed by the court after a confirmation hearing where the court finds the plan is proposed in good faith and is feasible without the need for further financial reorganization.

Given the complexity and stakes involved, consulting with an experienced bankruptcy attorney is essential to navigate the Chapter 11 process successfully and achieve the best possible outcome for your business.

How Will the Right Chapter 11 Bankruptcy Lawyer Help You?

If you are a business owner, the right North Carolina Chapter 11 bankruptcy lawyer can answer all of your questions about bankruptcy, address your concerns, and provide you with specific bankruptcy advice based on your personal and business circumstances.

It is essential to disclose all of the relevant financial information about your business to your bankruptcy lawyer and to the bankruptcy court. Any failure to disclose that information can lead to serious negative legal and financial consequences.

In the best scenario, a business that files a Chapter 11 bankruptcy may continue in business throughout the reorganization process until it emerges from that process ready for success with a fresh financial start.

But with thousands of attorneys practicing in this state, how does a North Carolina business owner locate an experienced and dedicated attorney who provides the trustworthy bankruptcy insights, guidance, and advice you may need?

Let Gillespie & Murphy Advise You and Handle Your Business Bankruptcy

If you are a North Carolina business owner who is struggling with business debts or considering a business bankruptcy, the award-winning bankruptcy lawyers at Gillespie & Murphy will explain your alternatives and find the option that’s best for you and your business.

We help businesses as well as families and individuals who have accumulated debts that they cannot pay. If a Chapter 11 bankruptcy is the right option for you and your business, an attorney at Gillespie & Murphy will prepare the legal documents and guide you through the process.

Before you make a decision about a business bankruptcy, contact Gillespie & Murphy by calling to arrange for a low-cost, no-obligation legal consultation. We will use every available tool to help you reorganize your debts, remain in business, and prosper in the future.