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What happens when a business files for Chapter 11 bankruptcy?

Just a few months ago, the U.S. economy was strong and growing. But then things took a drastic turn with so many businesses shutting down or scaling back operations to slow the spread of the coronavirus. Perhaps, now your business is on the brink of closing and you are considering filing Chapter 11 bankruptcy to try to survive. What will happen if you decide to take that step?

Chapter 11’s automatic stay

First, once your business files for Chapter 11, creditors you owe money to must halt any action against your business. Your creditors also will have to cease any efforts to collect what your business owes. The automatic stay can last until the business bankruptcy is complete. However, creditors can file for relief – which allows them to prosecute any pre-bankruptcy claims. The court must approve that motion though.

Coming up with a reorganization plan

You will have four months to come up with a reorganization plan, restructuring your business finances so that you can pay the bills. As part of your reorganization plan, you must show how your business will pay:

  • Secured and unsecured creditors
  • Taxing authorities
  • Employees and anyone else with a financial stake in your business

Each of these are considered a separate class. Your Chapter 11 business reorganization plan must address each class individually. Your reorganization plan also must provide enough information for your creditors, taxing authorities and employees to evaluate whether they should approve it. Your creditors also may propose their own reorganization plan for you. Ultimately, you and a majority of your creditors must agree to a payment plan.

Your time to agree upon a reorganization plan with your business creditors can extend up to 18 months, if the court approves that. Once your plan is approved, your business is out of bankruptcy and it must follow the reorganization plan.

A Chapter 11 bankruptcy can take between six months and two years, depending on how quickly a business and its creditors can accept a reorganization plan.

If you think pursing Chapter 11 might be the best option for your business, consult an experienced bankruptcy attorney. An attorney can advise you on how your business can survive through bankruptcy.