What Happens When a Business Files for Chapter 11 Bankruptcy?

Although Chapter 11 bankruptcy offers significant protections for struggling businesses, the resulting reorganization may not be worth the time, effort and money involved. It’s important to understand what actually happens through the filing to make sure it’s right for you and your business. 

When a company files for Chapter 11 bankruptcy protection, it means that the company is in danger of going out of business due to a significant amount of accrued debt. It needs the help of state and federal protections to keep it from doing so.

This proceeding is perhaps the most widely-known because instead of a full liquidation of assets, the courts and trustees will work to keep the business going through store closings, consolidations, and other measures. Perhaps what’s less known is exactly what happens to a company once they make the formal filing. Several things happen almost immediately that directly affect how the business operates.

What Happens to a Company Initially Through Chapter 11?

Chapter 11 is a “reorganization” process with the goal to make the business profitable again. Company management will continue to run day-to-day operations, but a bankruptcy court must approve all major decisions.

The U.S. Trustee (the bankruptcy arm of the Justice Department) may appoint one or more committees to represent creditor (and potentially stockholder) interest to build the reorganization plan. Whether these committees are appointed depends on the size of the business and the number of parties in interest (creditors, stockholders, bondholders, pensioners, etc.). The U.S. Trustee makes its initial determination based on the schedules and statements filed in the case, the initial debtor interview, and the creditors’ meeting. The plan must be accepted by creditors, bondholders, stockholders and confirmed by the court (although the court can confirm a plan even if these parties reject it).

How Companies with Significant Property Navigate Chapter 11

If the company is large enough, it must consider how they will reorganize and cut down the number of properties they have. Retailers now get a maximum of 210 days to figure out which store leases to keep and which ones to let go. With this short time span, many companies choose to liquidate as opposed to reorganizing.

What it comes down to is whether the company has a solid foundation to continue operating. Can it be competitive? If so, can it be profitable? Can it be a reliable employer? These are all questions that need to be taken into consideration and ones that a qualified bankruptcy law firm can help answer. Natural State Law is a trusted source for Arkansas businesses working through bankruptcy and is ready to help yours navigate the process. Call us today at (501) 916-2878 to learn more and schedule a free consultation.