is constructed so that neither the debtor nor creditor has a clear
advantage. It encourages negotiated settlements of disputes, as well
as negotiated reorganization plans. Good bankruptcy attorneys know
that litigation often leads to the worst possible results for both
parties. Therefore, it is important to recognize that during a Chapter
11 proceeding there will be negotiation and compromise by both sides.
The overall benefit of Chapter 11 is that it
enables debtor businesses to be saved, and even cured of their
financial ills. This approach is unique to the American justice
system. In the majority of countries, creditor relief, not debtor
protection is of major importance.
In Chapter 11 there are two primary issues;
rehabilitation and restructuring.
Without doubt, the single most important
benefit of Chapter 11 is the automatic stay. Like an injunction,
the automatic stay restrains creditors from any act against the debtor
or their property, such as repossession, foreclosure or litigation.
The stay is automatically invoked upon the filing of the Chapter 11
petition. The court may punish creditors violating the stay by having
a contempt charge filed against them. While in Chapter 11 the debtor
is allowed to put all debts on hold. The company, with few exceptions,
may not pay any of its pre-petition debts. The combination of the
automatic stay and the moratorium on debt payment provides the debtor
a chance to preserve and, if necessary, to recreate a valuable going
concern that can operate profitably.
The filing of a Chapter 11 petition often
restores a company’s ability to borrow money or obtain credit. The
reason is that post-petition borrowing must be paid back before any
payment can be made to pre-petition creditors. In fact, under
appropriate circumstances, a bankrupt firm can secure a borrowing with
a lien on assets that is senior to existing liens. In legal jargon
this is referred to as “priming the lien.” If the company can show
lenders that it can operate profitably, if it does not have to pay its
pre-petition debt, chances are very good that it will be able to
borrow needed operating capital. This is why so often we read about
bankrupt companies obtaining large sums from financial institutions
shortly after they have filed Chapter 11. Often times, even trade
creditors are persuaded to extend credit terms.
After a period of business stabilization, which
can last a few months or many years, a company restructures its
financial affairs by proposing a plan that can be confirmed by the
court. The bankrupt as a proponent of the plan, has several options
available to restructure its affairs.
Installment obligations, such as leases or
promissory notes that have been accelerated because of nonpayment can
be reinstated, over creditors objections. All that is required is that
the obligation be brought and kept current.
Leases can be assigned to others or rejected.
Debts can be paid in installments or discharged by paying only a
portion of the debt. Taxes must be paid in full but can be pain in
installments over a seventy-two month period.
The fact that creditors do not agree with the
plan of reorganization proposed by the debtor does not mean the court
will reject the debtor’s plan. There is a term in bankruptcy
parlance known as “cram down”. This means that a dissenting class
of creditor, such as unsecured, can be forced to accept the plan.
I wish you well.