The business grows and everything is fine. Then the recession hits. Everyone wants to get paid. The checkbook is empty.
You're convinced that the business is fundamentally sound, but the banker will not extend any more credit, nor will your suppliers. If only there were a little more time. But time has run out. Now what?
Now may be the time to consider Chapter 11 corporate bankruptcy.
WHAT IS IT?: Chapter 11 of the U.S. Code of Law permits a business to reorganize its financial affairs in order to make another attempt at survival. It permits a business to put creditors on hold to give the business a breather while it creates a formal plan to pay them in part or in full. This is a serious process with its own set of federal legal rules.
HOW TO START: To start the process you can save a couple of dollars before a lawyer is involved. Go to a stationery store or the Daily Record legal newspaper to obtain the forms you will need to file for corporate Chapter 11 reorganization bankruptcy. If your business is a partnership or a proprietorship, there is a slightly different set of procedures to follow because this falls in the realm of personal bankruptcy.
The required papers include the schedule of assets and liabilities for the corporation. The other major form is the statement of affairs which is a general review of the business' status. It is a narrative which you will write on the form in response to a long series of questions. Note, the U.S. Bankruptcy Court clerk does not sell these forms.
Complete the papers, then hire a lawyer. Contact the Bar Association in Baltimore or D.C. for a referral or look in the library for the Martindale-Hubble which is a directory of lawyers. Refer to the index for those who specialize in bankruptcy law.
The lawyer will review your responses and make recommendations for changes. To save a few more dollars, you can make the final changes, then the rest is in the lawyer's hands. Only an attorney may file the forms for a corporation with the court. In Maryland, the Court for the D.C. area counties is in Rockville. All the other counties file in Baltimore and the filing fee is $500. Once your lawyer has filed your papers with the bankruptcy court, the U.S. Trustees Office in your jurisdiction takes over. Each day a trustee staffer obtains copies of the papers which have been filed that day.
U.S. TRUSTEES OFFICE: The Trustees Office reviews the papers while it is the Bankruptcy Court which issues notice to creditors. The creditors which you listed on your initial statement of liabilities are sent a form called the proof of claim which they must complete and return as evidence that they are actually owed money which is usually an invoice.
Remember, during this whole process your firm and the creditors are in a temporary limbo. Upon receipt and review of the creditors' proof-of-claim forms, the U.S. Trustees Office invites all of the creditors to something called the "341 Meeting." At this meeting with you and your creditors, the plan to get out of bankruptcy is initially discussed. The creditors do not have to attend; however you, the debtor, must appear with your lawyer. After the initial meeting, you must submit a plan to the trustee to get out of bankruptcy.
THE BANKRUPTCY PLAN: Your lawyer will group all of the creditors into classifications. Some common classifications are: secured, unsecured and tax-related liabilities. There will be an administrative priority class which includes the monies due to the Bankruptcy Court, your lawyer and the U.S. Trustees Office -- they all get paid first, of course.
The business' bankruptcy plan will state how and when the creditors will be paid; an example is for all unsecured creditors to be paid at 50 cents on the dollar. The creditors must agree to the final plan for their classification so the plan can be endorsed by the trustee.
Note, all the creditors in a classification must be treated in the same fashion. For instance -- a major vendor with whom you want to continue to "do business" cannot be paid 90 percent of their bill (in order to stay in good favor) while you plan to pay all the other vendors at 50 percent.
The U.S. Trustees Office manages the process to establish the agreement by the various creditors on how they will be paid.
In conjunction with your lawyer or business adviser, the plan is developed and it usually takes a year to complete. Part of the delay is due to the fact that all of the creditors must agree to it, then the U.S. Trustees Office makes its recommendation for the Bankruptcy Court to finally review and approve.
Once accepted, you are out of bankruptcy and you must follow the plan until all creditors are paid. Note, if a creditor is on the schedule to be paid 50 cents on the dollar, the remainder is simply forgiven. The trustees office will monitor the schedule.