To understand all options and avoid actions that may impair the ability to accomplish a more fulsome solution to the problem, it is best, if possible, to retain qualified restructuring counsel while the business still has some liquidity and prior to entering into any significant debt modification agreements with existing creditors. In addition, understanding the risks and likely outcomes for all parties in a corporate bankruptcy proceeding is often necessary to achieve an effective out of court restructuring. The Houston business bankruptcy lawyers at Mitby Pacholder Johnson PLLC, with co-counsel as necessary, can provide you with sound advice about your options both in and out of court.
Types of Corporate Bankruptcy
If a satisfactory restructuring of the business’s obligations cannot be accomplished out of court, filing for bankruptcy may provide the safe haven from creditors necessary to negotiate with creditors and restructure obligations in a manner sufficient to enable the business to survive. This is accomplished through a filing under Chapter 11 of the bankruptcy code. If it is necessary or desirable to cease operations and liquidate and distribute the business’s assets in an equitable manner, a Chapter 7 bankruptcy may be the best option.
Chapter 7 Bankruptcy
A business Chapter 7 is a liquidation proceeding. In a bankruptcy proceeding under Chapter 7, an independent third party trustee will be appointed, the business’s assets will be sold, and creditors will be paid to the extent possible from the proceeds in accordance with the priorities set forth in the bankruptcy code. This type of proceeding is typically used only as a last resort when all other alternatives have been explored and exhausted.
Chapter 11 Bankruptcy
A Chapter 11 business bankruptcy is a reorganization proceeding under which the business may continue to operate while a plan for restructuring the business’s debts is negotiated. In a Chapter 11 proceeding, the existing owners of the business retain control over the business subject to bankruptcy court oversight. Immediately upon filing, creditors are stayed from taking any actions to collect on debts that were incurred prior to bankruptcy or exercising any actions in respect of the company’s assets without first obtaining relief from the bankruptcy court. This automatic stay gives the business breathing room to negotiate and seek approval of a reorganization plan under which its debts can be restructured in a manner that will enable the business to continue operating.
In 2019, Congress enacted a small business subchapter (subchapter V) under chapter 11 of the bankruptcy code aimed at reducing the costs and increasing the flexibility for reorganization of small businesses with less than $2.725 in aggregate debt. The CARES Act (Coronavirus Aid, Relief and Economic Security Act) recently increased that debt limit to $7.5 million. Unless permanently increased, however, the small business subchapter debt limit will revert back to $2.725 million on March 27, 2021.
Our firm handles bankruptcy matters including:
- Bankruptcy and Insolvency Related Litigation
- Out of Court Workouts
- Chapter 11 Bankruptcy
- Corporate Restructuring
- Debt Renegotiations
Houston Corporate Bankruptcy Lawyers
Mitby Pacholder Johnson PLLC represents corporations, creditors’ committees, shareholders, trustees, secured and unsecured creditors, court-appointed trustees, and parties involved in disputes arising from business dissolutions or restructurings. For more information on how our lawyers can counsel your business on its best course of action, contact us.