Understanding Bankruptcy Chapter 11
Chapter 11 bankruptcy is commonly known as a “reorganization” bankruptcy case. Voluntarily filing Chapter 11 bankruptcy is the only reorganization option available to individuals who don’t meet the eligibility requirements for Chapter 13. It is also the reorganization option available for businesses, though small businesses can be disincorporated with assets and liabilities transferred to the proprietor before they file Chapter 13.
At my Yarmouth, Maine firm, the Law Office of J. Scott Logan, LLC, I have helped many clients with Chapter 11 bankruptcy. While it allows businesses including corporations, sole proprietorships and partnerships to remain operational and in control of the assets of their business, Chapter 11 can be an expensive process in which creditors have control over the outcome of the debt restructuring. The process of Chapter 11 involves creating a proposed plan for the reorganization. Creditors may vote on accepting part or all of the plan. When the voting is complete and other legal requirements are met, the court may confirm the reorganization plan. To avoid the creditor voting process, please ask me about the new Subchapter V option in Chapter 11.
Unvarnished Record Disclosure Is Critical
The key to successful bankruptcy filings is your honesty. You must provide full disclosure of your financial records, including cohesive lists of:
- All financial assets and debts
- Current income sources
- All expenditures
- All contracts for goods and services
- Unexpired leases
You will also complete and file a statement of your financial affairs summarizing how you have come to be in these financial circumstances and your future intentions. There may be rare occasions when the court orders otherwise.
Individual debtors or a married couple filing Chapter 11 bankruptcy jointly will also need to file:
- A certificate of credit counseling
- A debt repayment plan developed through credit counseling
- Proof of employment and income received 60 days before filing Chapter 11
- A statement of monthly net income
- A statement of any expected pay raises
- A statement of increases or unusual expenses after filing
Most of my clients who are eligible for Chapter 13 prefer that route. However, Chapter 11 is a viable alternative.
Frequently Asked Questions On Chapter 11
During consultations, business owners ask how Chapter 11 affects daily operations, employees and control of the company. These answers address common concerns for Maine businesses considering reorganization.
Can a Maine business keep operating after filing Chapter 11?
Yes. In many cases, Chapter 11 allows a business to stay open while it reorganizes its debt. The company usually becomes a debtor-in-possession, which means the owner or management team continues to operate the business during Chapter 11 bankruptcy instead of handing control to a trustee.
However, staying open does not mean operating without rules. The business may need court approval for major decisions such as:
- Taking on new financing
- Selling significant assets
- Breaking leases
- Paying certain prefiling debts
Regular reporting, budget discipline and transparency are also required when running the business. Chapter 11 can give a Maine business room to keep operating while it reorganizes debt, renegotiates contracts and protects important customer relationships.
What happens to workers when a Maine company files Chapter 11?
Employees do not automatically lose their jobs when a business files for Chapter 11. Many companies file because they want to preserve operations, keep skilled workers and stabilize payroll while restructuring. Employee issues usually include:
- Wages: Certain unpaid employee wages may receive priority treatment in bankruptcy.
- Benefits: Health insurance, retirement contributions and other benefits may continue, but changes may require review.
- Layoffs: If layoffs become necessary, the business may need to consider federal Worker Adjustment and Retraining Notification (WARN) Act rules.
- Retention: Key employees may be critical to keeping the company operating and preserving value.
Chapter 11 employee rights should be reviewed carefully because mistakes with wages, benefits or layoffs can create additional legal and financial problems.
Does Chapter 11 mean losing control of the company?
Usually, no. One major benefit of Chapter 11 is that the business owner remains in control as the debtor-in-possession. This allows management to keep running daily operations, working with vendors, serving customers and making ordinary business decisions.
The court may appoint a trustee only in serious situations such as fraud, dishonesty, gross mismanagement or harm to creditors. For most businesses, Chapter 11 is designed to provide oversight without immediately removing the people who understand the company best.
Because Chapter 11 involves court supervision, employee obligations, creditor negotiations and strict filing requirements, working with an attorney is important. As your lawyer, I can help protect the business, preserve operations and guide the company through each stage of reorganization.
Get Knowledgeable Counsel, Advice And Legal Representation
I am J. Scott Logan. I have more than 15 years of experience assisting my clients throughout Maine with their bankruptcy questions and filings. I look forward to helping you. Call my law firm, the Law Office of J. Scott Logan, LLC, in Yarmouth at 207-613-8590 to arrange for a free consultation. You may also send me an email to do the same.
Law Office of J. Scott Logan, LLC, is a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code.