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Filing Chapter 11 for Your Small Business

Bankruptcy Lawyer

Most people are aware of Chapter 7 and Chapter 13, the two different personal bankruptcy options. However, if you are a small business owner who is also struggling with overwhelming debt in your business, you can also file for bankruptcy protection for your business. This type of bankruptcy is called Chapter 11.

What Happens If I File Bankruptcy for My Business?

Once a company files a Chapter 11 bankruptcy petition, they gain certain key rights and responsibilities. The filing company becomes responsible for offering a reorganization plan that assigns updated legal rights to the creditors. The reorganization plan will specify how much, and when, each class of creditor is to be paid. All impacted creditors will have an opportunity to vote to accept or reject this reorganization plan. However, in some cases, the debtor company may be able to get its planned approved over the rejections of creditors. This is referred to as a cramdown.

What Are the Cramdown Requirements?

All Chapter 11 bankruptcy plans must adhere to the requirements in the U.S. Bankruptcy Code. As a general rule, reorganization plans must be approved by each class of affected creditor. However, the code includes a ‘cramdown’ provision, which provides an exception but this can only be done if the plan meets certain strict legal requirements. A cramdown can only occur if a reorganization plan:

  • Has at least one class of creditor voting in favor of it
  • Ensures that each objecting creditor class receives no less under the plan than they would if the company was liquidated
  • Is feasible, meaning that the likely result of the plan cannot be future liquidation or further necessary restructuring
  • Does not unfairly discriminate against any objecting creditor class

Finally, in addition to those requirements, a cramdown can only move forward if the reorganization plan treats each objecting class fairly and equitably.

How Does the Bankruptcy Court Determine What Is Fair and Equitable Treatment?

Determining whether or not treatment is ‘fair and equitable’ is complicated in any legal case. For cramdowns, there is a two-part standard for assessing a reorganization plan’s fairness and equitability. The plan must ensure that no payment can be made in excess of the claim and that it conforms to the absolute priority rule.

The absolute priority rule states that all objecting creditors cannot be forced to accept partial payments, via a cramdown, if a lower priority level of creditor or equity holder is receiving any payment at all or is allowed to maintain their current interests. As a simple example of the application of this rule: absolute priority guarantees that, when a cramdown occurs, unsecured creditors cannot get paid at all before objecting secured creditors are paid in full.

Contact a Bankruptcy Law Firm Today

If your business is facing financial difficulties, bankruptcy may be the best option for you situation. To learn more, call an experienced attorney, like a Chicago bankruptcy lawyer from a law firm like Therman Law Offices, LTD.

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