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Chapter 11 bankruptcy is occasionally used by individuals, but is more commonly utilized by businesses. Though arguably the most complicated form of bankruptcy Chapter 11 has the power to save a failing business from complete financial collapse when used strategically. Chapter 11 also has an added benefit for business owners: unlike other forms of business bankruptcy, such a Chapter 7, it allows the company to continue operating while the case is pending. In this article, our Roseville bankruptcy attorneys will provide a basic overview of how Chapter 11 works for businesses in California.

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What Does Chapter 11 Mean for a Business?

Under the right circumstances, Chapter 11 may mean the difference between a business permanently closing its doors, and reemerging from debt financially revitalized. By timing your filing strategically, and making sure you are in compliance with bankruptcy regulations, our Chapter 11 bankruptcy attorneys may be able to help stop your company from going out of business.

Chapter 11 bankruptcy is sometimes called “reorganization bankruptcy,” as is Chapter 13. Though Chapter 13 is only available for individuals (including sole proprietors), both types of bankruptcy require the debtor to create a reorganization plan, which is where the term “reorganization bankruptcy” comes from.

The reorganization plan allows the filer to restructure debts without having to surrender property to a bankruptcy trustee, which is a major advantage over filing for Chapter 7. If a business files Chapter 7 bankruptcy in California, its property and assets will be sold by a court-appointed trustee, and the business will be forced to close. If a business owner wishes to file bankruptcy and continue daily operations, he or she must file Chapter 11. If you are a small business owner in California, and don’t know whether you should file Chapter 7 or Chapter 11, our bankruptcy Chapter 7 attorneys can help you figure out which option would be more practical.

In most Chapter 11 cases, the bankruptcy court will allow the business to continue running as a “debtor in possession” (DIP) without assigning a trustee to the case. However, the court may decide it is necessary to assign a trustee if there are unusual circumstances, such as fraud or egregious mismanagement of the company’s finances. Further, even if no trustee is assigned to the case, the DIP must still obtain court approval to make major decisions about business operations, such as opening additional locations or signing a new contract with a vendor.

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Filing for Bankruptcy Chapter 11 in California

Like any bankruptcy case, a Chapter 11 case typically begins when the debtor files a voluntary petition for bankruptcy. There are also situations in which creditors can force a business into filing bankruptcy, but only if certain financial requirements under 11 U.S. Code § 303 are met. For the purposes of this article, our Sacramento business bankruptcy attorneys will focus on voluntary Chapter 11 petitions.

Depending on the situation, the company may file for bankruptcy in its principal place of business (wherever operations are primarily centered), or in its state of incorporation (the state where the business filed articles of incorporation), which is also referred to as the place where the business is “domiciled.” Our Folsom bankruptcy lawyers for small businesses can help you make the right decision about where you should file Chapter 11.

Filing for Chapter 11 requires a substantial amount of paperwork and documentation. In addition to filing your voluntary bankruptcy petition, you will also be required to submit a disclosure statement (Form B 25B), an attachment to the voluntary petition describing debts and assets (Form Form B 201A), and – most significantly – the plan of reorganization (Form B 25A) around which Chapter 11 cases revolve. You and your Roseville small business bankruptcy lawyer must propose a reorganization plan, sign it, and submit it to the bankruptcy court for approval.

In order to be confirmed by the bankruptcy court, your plan must meet certain criteria. For example, the plan must meet the best interests of your creditors, which means that under the proposed plan, your creditors would receive, at minimum, the same amount they would have received if you had filed for Chapter 7. (On a related note, keep in mind that you may be forced to convert your Chapter 11 into a Chapter 7 if you prove unable to meet the terms established by your reorganization plan.)

At first, you will be the only party who has the right to propose a reorganization plan. However, once four months have passed, this exclusivity period will come to an end, and your creditors will gain the right to submit plans of their own, unless you are able to obtain an extension of the exclusivity period.

The duration of Chapter 11 proceedings can vary widely from case to case. Depending on the circumstances, a Chapter 11 may take anywhere from several months to several years to complete successfully. The ultimate goal or purpose of Chapter 11 for a business is to manage debt and continue operations, instead of being forced to sell or shut down.

Roseville Business Bankruptcy Attorneys for Corporations and LLCs

The Bankruptcy Group assists all types of business entities with Chapter 11, Chapter 7, and Chapter 13, including S corporations, C corporations, limited liability companies, partnerships, and sole proprietorships. Whether you run a local, family-owned business with your spouse and children, or a large company with thousands of employees and shareholders, we can help you get business debt under control.

If you own a business in the Roseville, Sacramento, or Folsom area, and you’re worried about financial problems that seem to be growing out of control, we encourage you to contact The Bankruptcy Group to talk about your options in a free and confidential legal consultation. To discuss how a California business bankruptcy could help your company avoid insolvency, contact our law offices at (800) 920-5351 today.