What are the Benefits of Chapter 11 Bankruptcy?

Posted on January 21, 2015 at 10:06am by

Business Bankruptcy Attorneys on Advantages of Filing Chapter 11

What do the clothing stores dELiA*s, Wet Seal and Deb Shops have in common? Other than being popular with teenage girls, these stores have recently gone public about their debt troubles. While Deb Shops and dELiA*s have already sought protection under Chapter 11 bankruptcy, Wet Seal may be next to file if its plan to resolve cash flow problems does not succeed.

Why Would a Business File Chapter 11?

A corporate entity will typically file Chapter 11 when the long-term profits it would make staying in business and reorganizing its debts through bankruptcy will benefit creditors more than the revenue gained from selling its current assets. Using the business bankruptcy case of dELiA*s as an example, dELiA*s plans to liquidate its merchandise, stocked inventory, some store furnishing and equipment as approved by the bankruptcy court to meet its debt obligations.

Similar to individual bankruptcies, Chapter 11 provides an automatic stay of any lawsuits, foreclosure or collection proceedings creditors may be seeking against a business. Chapter 11 reorganization may also allow a company to:

  • Cure defaults of debts
  • Stop the acceleration of debt deadlines by lenders
  • Choose which leases and executory contracts it wishes to maintain or reject for economic reasons
  • Restructure payments of secured debts
  • Maintain its customer base, goodwill and going concern
  • Remove the liens and interest off certain assets to sell to buyers without encumbrances
  • Benefit from a debt repayment plan that can last up to 10 years

What is a Debtor in Possession?

Filing for Chapter 11 protection provides businesses with another unique benefit only available in this type of bankruptcy. Called debtor in possession (DIP), a DIP continues to control and operate the business during the bankruptcy process with approval from the court and creditors’ committee. Operating as a debtor in possession can allow companies ranging in size from small businesses to national retail chains to reorganize their debt priorities to meet the end goal of becoming profitable again, wind down or potentially sell the company.

Should My Business File Chapter 11 Bankruptcy?

Having an attorney guide your business through Chapter 11 can ensure that creditors and stockholders of your company are satisfied with the plan to reorganize secured debt, discharge certain unsecured debts and help get your business back in the black. For some companies, like dELiA*s, bankruptcy is a chance to close stores and pay back creditors by holding going-out-of-business sales.

If your business is in the red and you need help determining if restructuring debt in Chapter 11 could help save or wind down your business, ask a lawyer at our firm if bankruptcy is the best debt relief option. We offer a free initial phone call with an attorney to any business in Missouri and Kansas.