Who Needs Small Business Chapter 11? (Part Two)

Chapter 11 small business part one discussed some of the reasons businesses lose money, and the start of the analysis business owners need to do before deciding if a small business Chapter 11 makes sense.

So, you figure out what it cost to run the business every month, then, you know how much you need to make a profit going forward.

Next, what will those receipts be?

Estimate conservatively, figure a bunch of people won’t pay, you will not collect all receivables.

In estimating costs going forward, guess high.

This way, if you make more than you thought, or you spend less than you thought, your surprises are all on the upside.

If you are considering Chapter 11, you probably do not have additional money to put into the business.

Now, if the business is going to go from loss to profit, chances are, something changed!

The evil partner-bookkeeper-employee who stole the money is now gone, the plant did re-open, the insurance companies are paying more for auto repairs, whatever.

So, if you reasonable expect to be able to operate at a profit going forward, we have to look at those pre-petition debts.

Pre-petition means, before filing a bankruptcy.

Of course, before you file, everything is pre-petition.

So, leases for stuff you want to keep, office, business location, equipment, phones, whatever, are both an expense that is part of the overhead, and a pre-petition debt that you will want to pay going forward.

Unless you can get along without that office or piece of equipment, in which case Chapter 11 is a great opportunity to dump the stuff and not pay for it.  (actually, any unpaid balance would be an unsecured claim).

Next, we look at secured debt.

If you are buying the office building, or have a mortgage on real estate the business owns, or are buying vehicles, equipment, et cetera, you have the same option of returning the stuff and paying nothing (again, any unpaid balance would be an unsecured claim).

Unless the debt is a mortgage securing your principal residence, a Chapter 11 plan can re-write that debt, writing the balance of the secured claim down to the value of the item, and changing other terms of the original contract.

Another category of debt is a priority claim.

That would be wages owed to employees for the time close to filing, and many tax claims.

Any tax liability you owe for employees is going to have to be paid in a Chapter 11 plan, and follow you around personally anyway.

So, the plan must sell assets, or show future income, sufficient to pay off those priority claims.

Best news of all, most likely, you will have to pay very little to unsecured creditors.

And, unlike Chapter 13, there is no limit as to how long a Chapter 11 plan runs, though there is a deadline on paying some tax claims.

Bottom line:  if your business has fixed, or can fix, the part that caused it to lose money, and, can operate at a profit going forward, Chapter 11 can work.

Obviously, not for the amateur.  Do not try this at home.

If you have a CPA, get all tax returns filed and up to date, and the books, profit and loss statement and balance sheets, current and accurate.

Then a Chapter 11 attorney can help.