Strategic Business Debt Reorganization

Due to the recent economic contraction, many small and mid-sized Jacksonville businesses across varying industries and sectors have been saddled with a significant amount of debt. In many cases, the debt is unsecured or secured by collateral that has insufficient value to match the debt.

Further, many owners of corporations or limited liability companies can face personal liability if they cosigned or personally guaranteed the debt. In addition, Florida state law provides the ability of creditors to “pierce the corporate veil” and attach business debts to business owners in situations where there were fraudulent transfers, or corporate assets were improperly comingled with personal assets.

Carrying too much debt and toxic, underwater assets can cripple a business’ ability to operate, meet financial obligations, refinance, leverage assets, or obtain necessary short or long term financing.

Chapter 11 Basics

During a Chapter 11 Bankruptcy proceeding, the business debtor is provided with the opportunity to formulate its own plan to reorganize its debts. The plans can vary from a simple repayment plan to stock offers, contractions, or principal reductions. Under a Chapter 11 reorganization plan a company may even be allowed to void some of its contracts. A business can use this power to their benefit to renegotiate contracts which may have unfavorable terms.  After the business debtor has crafted a reorganization plan that it believes to be financially feasible and palatable to the creditors, it is presented for vote.

Take Back Control

Unlike a reorganization plan in a Chapter 13 where the Trustee is appointed by the Court to oversee and control the assets of the estate, the business becomes a debtor in possession to serve as its own trustee in a Chapter 11. The business debtor in possession is afforded the opportunity to maintain control and ownership of its own assets. Further, the Chapter 11 business debtor may continue their regular operations, including its routine sales and purchases that are part of its standard business operations.

In addition, a Chapter 11 business may also avoid certain payments or purchases that occurred within the 90 days to one year period immediately prior to the filing of the bankruptcy petition.  Depending on the circumstances and specific facts of the case, payments may be returned directly to the business debtor or, in other circumstances, will simply become part of the overall reorganization plan.

Help For Small Businesses in Jacksonville

While Chapter 11 cases for large conglomerates like Lehman Brothers and General Motors tend to steal headlines and media attention, the vast majority of Chapter 11 cases are filed by small or mid-sized businesses.

The Chapter 11 Bankruptcy Code contains several provisions designed specifically to assist small businesses that have become overwhelmed with debt. These provisions provide a strategic advantage to a small business debtor in a Chapter 11 case.

For purposes of Chapter 11, a “small business debtor” is defined as an individual, corporation, partnership, or limited liability entity engaged in a commercial or business activity with total secured and unsecured debt less than $2,343,300.

There are many advantages for a “small business debtor” to file for a plan of reorganization under a Chapter 11 Plan, including:

1. Increased Speed of Administration. The Bankruptcy Court is required to confirm a plan for a small business debtor no later than 45 days after the plan is filed. There are some circumstances where the time period may be extended.

2. Conditional Approval of Disclosure Statement. In Chapter 11 cases involving large corporate debtors, the corporation is required to file a comprehensive disclosure statement and serve copies of the statement on all interested parties. The disclosure statement is voluminous, comprehensive and extremely detailed. The process requires a great deal of information and its preparation is time consuming and expensive. A small business can save considerable fees, costs, and most importantly, time, by qualifying for this exemption. A small business may receive conditional approval for a disclosure statement without having to provide notice or go through a formal Court hearing. In some circumstances, the Court may not require a disclosure statement from a small business debtor if the Plan of Reorganization is deemed to contain adequate information.

3. Lack of Committee for Creditors. In Chapter 11 cases involving large corporate debtors, the rights and interests of the unsecured creditors are protected by a Creditor’s Committee, appointed by the U.S. Trustee. At the direction of the Bankruptcy Court, small business debtors can avoid the appointment of this committee. The Creditor’s Committee often hires attorneys and other professionals to aggressively pursue their claims. A small business can achieve a significant tactical advantage by avoiding the Committee.

4. Extra Time to Propose Reorganization Plan. In Chapter 11 cases, a small business debtor is provided with additional time with the exclusive right to file for a plan of reorganization. Large corporate debtors generally have the exclusive right to file a proposed plan of reorganization for 120 days after the case is filed. During this time, creditors are precluded from filing their own proposed plans of reorganization, which are often extremely unfavorable and harsh to the business debtors. The creditors’ plans often times force business debtors into having their Chapter 11 cases converted to a Chapter 7 liquidation plan. Small businesses receive the benefit of having an additional 60-day exclusivity period to file a reorganization plan.  Further, the small business debtor may seek leave of Court to extend this period to 300 days.

Why Chapter 11 Works

Businesses decide to file Chapter 11 to reorganize and restructure their debt. Chapter 11 business debtors are bullish on the future of the company and believe that the long-term revenues will be higher than the liquidation value of the assets. Most creditors realize that they will recover more money by allowing a restructure and working out a payment plan than by fighting for scraps from liquidation.

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