How To Reorganize A Struggling Business

Let me guess. Something went wrong in your business and now it’s headed south. You’ve identified the problem and fixed it, but in the meantime, your debts got out of hand and now you don’t see how you’ll ever catch up. Your banker would like to help you, but with your payment history and your current debt load, there is no longer anything he can do.

Many business owners and managers confronted with this situation just continue to struggle and hope that something will change. We hear in the news about great companies troubled by billions of dollars of debts reorganizing in “chapter 11” and emerging with a fresh start and going on to continue successful operations. It’s a little-known fact that smaller companies can do it too. Here’s how.

Chapter 11 is one of the “reorganization” chapters of the federal Bankruptcy Code. There are several chapters of the Code under which a debtor can seek protection from creditors. (Chapters 7 and 13 are the consumer bankruptcy chapters.). Chapter 11 is the one that enables both corporations and individuals to reorganize. What does it mean to restructure debts? It generally means you get a bankruptcy court to stop all collection efforts by creditors, and approve a plan of reorganization which,

  • Reduces the principal of your secured debt to the value of the collateral that secures that debt,
  • Rewrites each secured loan with reasonable terms, payments and interest rates,
  • Reduces unsecured debts to a manageable level,
  • Cancels unwanted leases and unprofitable contracts, and
  • Waives all defaults, giving you a fresh start.

How is this done? First, you petition the bankruptcy court for protection from creditors. The filing of the petition operates as an automatic “stay” that requires creditors to cease and desist from all collection efforts during the reorganization process – often six months to a year. You continue to operate the business and pay current operating expenses during reorganization.

Next, you propose a plan of reorganization. Creditors are given the opportunity to vote on whether the plan should be confirmed by the court. The court can confirm a plan over the objections of dissenting creditors, if the court considers the plan to be fair and equitable. Not surprisingly, confirmation requires that the payments required of you under the plan fit within your projected budget.

Once a plan is confirmed by the court, you emerge from bankruptcy and carry on with normal business operations. The confirmed plan replaces your previous obligations and becomes the new definition of your obligations to creditors.

Chapter 11 is a highly specialized area of bankruptcy law practice. The debtor considering reorganization in chapter 11 needs to locate an experienced bankruptcy attorney willing and able to handle such a case. The chances of successful reorganization are greatly enhanced, if the debtor begins the process earlier, rather than later. So, don’t wait until you are flat broke. Once it becomes evident that future success may depend upon reorganization, you would be well advised to put on your work clothes and begin investigating this process right away.