Bankruptcy Considerations During the Coronavirus (COVID-19) Part 1: Chapter 11 Bankruptcy

The Coronavirus (COV-19) has had a negative impact on everyone physically, mentally, and financially.  Businesses are no different.  Small and medium sized businesses are especially vulnerable in these troubled times.  They are faced with difficult decisions such as whether to temporarily lay off their employees or which bills to pay when little or no revenue is being received.

At McLaughlin & Nardi, LLC, we focus a portion of our practice on advising small and medium sized businesses when faced with these difficult financial decisions.  When a business becomes overwhelmed and unable to meet its financial obligations, filing a Chapter 11 bankruptcy may be a great means to get the business back on track.

Chapter 11 bankruptcy is very different from a Chapter 7 bankruptcy.  A Chapter 7 bankruptcy is the most common bankruptcy.  It involves a complete liquidation of an individual’s or business’s assets.  If a business files a Chapter 7 bankruptcy, it is required to close down its operations. In a Chapter 11 bankruptcy, the business is not required to close down but instead remain operational in order to restructure and pay down its debts.

 

Continuing Business Operations

A Chapter 11 bankruptcy allows a business to continue to operate while and after the close of the bankruptcy.  This is one of the four main benefits of filing a Chapter 11 bankruptcy.  The idea behind allowing the business to maintain its operations is that the only way for the business to at least partially pay back its creditors is by generating revenue through its business operations, and that a business is more valuable to society, the economy and its employees as an ongoing concern.

 

Automatic Stay

The second benefit, and a benefit in all bankruptcies, is that an automatic stay is put into place immediately upon filing a Chapter 11 bankruptcy.  The purpose of an automatic stay is to stop a business’s creditors’ collection actions such as a pending lawsuit, bank levies, wage garnishments, or constant collection calls.  The automatic stay allows the business time to set forth a plan to pay back its creditors without the constant pressure debt collection may bring.

 

Plan of Reorganization

The third benefit, and the main purpose of a Chapter 11 bankruptcy, is the plan of reorganization.  After filing a Chapter 11 bankruptcy, the business will be required to file a plan of reorganization.  This plan will set forth how the business’s creditors will be paid back.  Generally, a plan of reorganization will provide a business with more time to pay back its creditors than it would otherwise be afforded.  Further, the plan is also an opportunity for a business to adjust interest rates to certain high-interest loans that may be secured by the business’s assets.

 

Discharge of Unsecured Debt

The final benefit of filing a Chapter 11 bankruptcy is that the business may not be required to pay the full amount of the unsecured debts that it may owe.  Indeed, unsecured debt may be discharged in the event that a business’s plan of reorganization gets approved that calls for the repayment of less than full of the unsecured debt.

 

Contact Us to Discuss These Difficult Decisions

The decisions that businesses are facing today as a result of the Conoravirus are difficult and complex.  We want to help advise you and your business through these hard times and discuss the options available to you.  Therefore, you have any questions or would like to discuss the benefits of filing a Chapter 11 bankruptcy, please visit our website or contact one of our New Jersey business lawyers at (973) 890-0004.