It is very powerful for companies with too much debt, or with some unprofitable pieces that they need to get rid of because it lets them choose what gets paid, how much, and when, and to continue operating. They can also shed unprofitable pieces – like closing one location but keeping others.
There is another type of business bankruptcy called chapter 7. In a Chapter 7 bankruptcy, the corporation or LLC stops existing, and anything valuable that it owns is sold to pay creditors. If a business isn’t viable anymore, then chapter 7 is the better route. If it is still making some money, but just not enough money, then chapter 11 is the way to go.
WHAT HAPPENS WITH CHAPTER 11*
- The company chooses which of it’s leases to keep paying and to keep, and which to terminate early. This works on leases for equipment as well as leases for real property like offices, industrial, retail, or commercial space.
- For loans with collateral, the company can choose to keep the collateral and pay on the loan ONLY what the collateral is worth. This is almost always less than the balance of the loan.
- Loans and debts without collateral such as credit cards, vendors, and even suppliers or former employees get only a portion of what is owed. The company gets to pay this through the “reorganization plan” over several years in the future. Whatever isn’t get paid is discharged, and the company doesn’t owe it anymore.
- Management and ownership can stay the same.
- Lenders and landlords cannot evict, repossess collateral, or foreclose while the reorganization is taking place.
- The company can give back any collateral or equipment that is no longer useful and stop paying for the item.
Business bankruptcy is complicated, and this is a back of the napkin explanation, but it can be very powerful for companies that have large loans. Equipment is usually much more expensive to install than it can be sold for, so business loans can usually be lowered quite a bit.
Here is an example. A restaurant borrows $75,000 to install cooking equipment, tables, chairs, signs, and branding. This stuff costs $75,000 to buy new and install, but if they were to sell it all, the equipment would only get $30,000. In this case, the restaurant can pay $30,000 at market interest rate over the original time frame of the loan. This is a huge savings every month. The restaurant could also discharge money it owed to an old supplier or an accountant or marketing agency that didn’t bring in enough business. It could keep working with any vendors or suppliers that it liked.
This can make the difference and allow the restaurant to survive. If you want someone to look at your business and see if bankruptcy can help it become leaner and more profitable, then call Walker & Walker at 612-824-4357 today! We have a free attorney consultation for business owners.
*Note, Walker & Walker focuses on Small Business chapter 11s, which are different than traditional chapter 11s. We prefer the Small Business Reorganization Act because it is cheaper and has less steps for the business. Want to learn more? Then call us at 612-824-4357 for a free conference to figure it out.