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Continuing Your Business in Bankruptcy: Is this Possible?

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According to news reports, staff at Weinstein Company are continuing to report to work even though the company filed for bankruptcy protection after the exposure of founder Harvey Weinstein’s sexual misconduct. If you are a business owner, you might wonder how this is possible?

Actually, a Chapter 11 bankruptcy exists precisely so that businesses can reorganize their debts without shuttering. If you see a bankruptcy on your company’s horizon, you should consider whether a Chapter 11 is ideal for you.

A “Debtor in Possession”

With other bankruptcies, a trustee oversees the bankrupt estate. However, Chapter 11 is different. The party that files the petition will be named the “debtor in possession,” which allows them to run the business and exercise many of the same powers as a trustee. For example, most debtors in possession will have the power to:

  • Analyze and reject claims
  • Account for property
  • File any informational reports as required by the court
  • Hire professionals to help manage the estate, such as appraisers, accountants, and attorneys
  • File tax returns

If the business is small, then a trustee might exercise more oversight by requiring an initial interview. The trustee will also monitor whether the debtor in possession is likely to successfully obtain bankruptcy.

The Plan of Reorganization

The centerpiece of a Chapter 11 case is the debtor’s plan for reorganizing debt. In practice, this means identifying which debts the company will pay, how much, and which debts it wants to discharge. Debtors do not have enough cash to pay off all creditors, so it must decide how it wants to treat them. The bankruptcy code has a detailed scheme for classifying creditors by different classes.

Another wrinkle of a Chapter 11 is that creditors who will not be paid 100% of their claims get to vote on whether to accept the reorganization plan. However, if they reject it, then a judge can still approve the plan over the objections.

Deciding if a Chapter 11 is Right for Your Business

Business bankruptcies present unique challenges. In particular, you need to understand whether your personal assets are at risk by filing. This analysis will require that you look at the form your business takes:

  • If it is a corporation, then the personal assets of the owners are shielded and cannot be sold in the bankruptcy.
  • If your business is a sole proprietorship, then there is no legal distinction between the owner’s assets and the company’s assets. This means an owner could put valuable personal property at risk.
  • If your business is a partnership, then liability is often similar to that of a sole proprietorship.

In some situations, a Chapter 7 liquidation might be better for your company, which means the company will shut down. Not every business can be saved, and you do not gain anything by going through a Chapter 11 only to find your company insolvent six months later.

Speak with an Experienced Bankruptcy Lawyer in South Florida

If your business is in financial trouble, we want to hear from you. At Nowack & Olson, we have helped small business owners consider their options when they can no longer afford to keep the lights on. With offices conveniently located in Boca Raton, Jupiter, and Doral, we are never far away. Please contact us today to schedule your free consultation.

Resources:

pagesix.com/2018/07/02/weinstein-co-staff-still-coming-to-work-after-bankruptcy-filing/

uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics

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