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Signs You Should Consider Chapter 11 Bankruptcy

You have probably heard the term “Chapter 11 bankruptcy” in the news referring to large companies in financial trouble. In recent years, companies like General Motors, K-Mart, and United Airlines have filed for Chapter 11 bankruptcy. While this type of bankruptcy filing isn’t usually available to private individuals, it may be an option for some. Chapter 11 filings mostly relate to business operations. Here’s what you need to know about how to qualify for Chapter 11 bankruptcy, what it entails, and what it means for the future of a business that files for it.

How to File Chapter 11 Bankruptcy

Often called a reorganization bankruptcy, Chapter 11 bankruptcy allows a company to handle insolvency by reorganizing or discharging debt. In most cases, Chapter 11 bankruptcy filings are voluntary; a business debtor acknowledges financial trouble that will lead to the company’s ruin and seeks out debt relief from bankruptcy court. In rare cases, groups of creditors may band together to pressure an insolvent debtor into filing for Chapter 11 bankruptcy.

Entities that file for Chapter 11 bankruptcy typically include corporations, partnerships, and limited liability companies. In some cases, individuals may qualify for Chapter 11 bankruptcy if they do not qualify for Chapter 7 or Chapter 13 bankruptcy filing. However, individuals filing for bankruptcy face a more difficult process and added risk by pursuing Chapter 11 bankruptcy over Chapter 7 or Chapter 13.

Signs to Consider Chapter 11 Bankruptcy

Chapter 11 bankruptcy can offer a company the chance to reorganize debt and remain in operation, but sometimes it can simply be a stepping stone to closing down an insolvent business with as little fallout as possible. Some signs that should encourage business owners to consider Chapter 11 bankruptcy include:

  • Long-term cash flow problems. If cash flow is a perpetual problem, given that debts are continually accruing interest, you could dig yourself into a bigger hole by fighting the inevitable.
  • Risk to personal assets. In most cases, bankruptcy is a means to protect your personal assets from the effects of your unpaid debts. If you’ve co-mingled any of your personal assets with your business, filing Chapter 11 bankruptcy may be the only way to save some of what you personally own.
  • No opportunity for alternative resolution. You may be able to negotiate with some creditors, refinance existing debts, or explore debt consolidation. If there is a chance these methods could enable your company to continue and ultimately recover, you may avoid bankruptcy. If these options aren’t possible or your creditors aren’t willing to work with you, Chapter 11 bankruptcy is likely the next best option.
  • Potential to continue. In most cases, the companies most likely to file for Chapter 11 bankruptcy are those with the potential to eventually recover from the debt and continue their business operations. If current debt problems pose problems for your business’s future, filing for Chapter 11 bankruptcy sooner rather than later may help your company survive.

Chapter 11 bankruptcy filings don’t always ensure the filing company will survive. In many cases, creditors simply consider it easier to liquidate the debtor’s business and recover as much as they can. Smaller companies typically struggle the most with Chapter 11 bankruptcy filings, but larger companies can and have succeeded with their filings and remained in business.   If you are experiencing these signs, set up a free consultation with bankruptcy attorney Bill F. Payne.  He can explain your options and help determine a plan of action for your business.

Out-of-Court or Non-Bankruptcy Debt Workouts

The decision to file for bankruptcy is a major one for both individuals and businesses. Depending on the amount a debtor owes, the debtor’s status as an individual or a business entity, and the debtor’s creditors all influence a debtor’s options for debt relief and potential bankruptcy filings. While bankruptcy can ultimately be a beneficial option in some situations, any record of a bankruptcy filing could have implications for your financial future as a private individual or business owner.

Debtors can try to find non-bankruptcy financial workouts to handle their debts with minimal disruption to their financial futures. Filing for bankruptcy will help an individual or business discharge debts quickly but can make obtaining a loan more difficult in the near term. (If cash flow is a problem and you have already missed loan and/or credit card payments, this type of damage is likely already done.) Nevertheless, consider these alternatives to bankruptcy before deciding.

Debt Restructuring

A creditor may be willing to work with a debtor if maintaining the relationship in the long term is in the creditor’s best interests. Remember, debt renegotiations between debtors and creditors are voluntary exchanges; there is nothing stopping a creditor from eventually disagreeing with the restructured terms and pursuing payment of the debt in full. Restructuring could entail a change in payment amounts, interest rate, or the timeframe for the loan to stretch payments for a longer time.

Debt Settlement

Some creditors will be willing to agree to a lower settlement amount so the debtor and creditor can settle the matter and go their separate ways. If a creditor believes the debtor will never be able to repay a debt, the creditor may simply opt for settlement as a means of recovering something instead of nothing at all. A debt composition or settlement essentially means the creditor accepts partial payment to consider a debt paid in full.

Debt Consolidation

Be wary of companies offering debt consolidation as most often the consolidation simply replaces your existing debts with one large loan and a high interest rate and a longer term. Some debt consolidation companies are actually scam operations that prey on the vulnerable.  Never agree to pay a fee up front before your debts are settled.  This has become such a prevalent scam that the FTC made a law against it.

Forgiveness

While this option is virtually nonexistent in the business world, some individuals may qualify for some types of debt forgiveness, either through government programs or with the approval of the creditor. For example, an individual may persuade a creditor to discharge a debt in the face of a severe medical condition or similar circumstances.

If you have amassed a mountain of debt and are unable to secure an out-of-court solution, bankruptcy is likely your best option. An experienced lawyer who handles debt relief matters will be familiar with Texas law and will be able to explain your options for bankruptcy, then negotiate with creditors and work with you on a fresh start.   Contact the seasoned bankruptcy attorneys at the Law Offices of Bill F. Payne, P.C. today for a free consultation.