Chapter 11 bankruptcy reorganizes businesses rather than liquidating them completely. It isolates personal assets of corporate shareholders from the bankruptcy process, because the law recognizes corporations as individual entities. However, sole proprietorships and simple partnerships do not enjoy that privilege. Since unincorporated businesses merely represent personal investments of the owners, even owners' private holdings can apply toward business liabilities.
A petition is filed in the bankruptcy court to start the Chapter 11 process. This basically buys time for businesses to reorganize and propose a reasonable way to restructure debt. The process allows a time period when collection procedures stop as the debtor considers how to reorganize investments and operations.
During this time the applicant becomes a de facto trustee, as debtor in possession of the business assets, without investigative related responsibilities. Obligations that do apply include getting all accounting and ownership documentation in order, reviewing and responding to claims and filings, and meeting any additional requirements from court officials.
This part of the process should produce four essential documents. One lists assets and liabilities. Another coordinates income and expenses. A third delineates contracts still in effect and unexpired leases - commitments which may require a buyout to cancel. These all contribute to creating the fourth document, an overall statement of financial affairs.
When the results of all this research and accounting come together the debtor can offer a plan for recovering the business and meeting obligations to creditors. For all but small businesses, the law allows a 120-day period that can extend up to 18 months, but can also be reduced by the court, to file that plan. If other parties do not like the plan they can file an alternative approach, and then negotiate it, or argue it before the court. If creditors holding at least two-thirds of the debt accept the plan, it can go forward.
All of these demands can add extra pressure on owners of already struggling businesses. Fortunately they need not confront the challenges of Chapter 11 alone. A well-informed attorney can keep up with court requirements for owners, freeing owners to go about their business, and keep it in as good condition as possible. This can be especially important for sole proprietors and partners, whose personal assets may be at risk.
