Chapter 11 Bankruptcy in New Mexico
Chapter 11 bankruptcy is a process whereby a business organization can discharge its unsecured debts after a restructuring agreement and repayment period. An agreement will be formed between creditors and the debtor to determine exactly how much debt will be discharged, how much will be repaid, and how regular installments will be made in order to pay down the debt.
During the repayment period, the business will be expected to operate with the intent to satisfy creditors’ liens on the company. This means that all activities and decisions must be geared towards creating revenue to pay down debt. The court supervises this process, and in many cases, a United States trustee is appointed to observe and intervene as needed.
Because of the limitations posed by this arrangement — as well as the damage to business relationships that Chapter 11 can create — companies considering filing for Chapter 11 bankruptcy should first examine their alternative options. Many times, a consensual agreement (a “workout”) can instead be formed between business creditors and debtors.
If you are unsure of your options, have questions about bankruptcy, or are interested in beginning the process, you can seek legal counsel from Albuquerque-based New Mexico Financial & Family Law. We provide consultations and are ready to apply our experience and expertise to your case.
Call (505) 503-1637 or contact us online to schedule your appointment and request free information on our qualifications, available resources, and past client successes.
Consider Alternatives to Chapter 11 Bankruptcy, Such as a Workout
Business coach and successful business owner Brad Sugars once said: “Business is all about relationships …how well you build them determines how well they build your business.”
When a business decides to undergo Chapter 11 reorganization, they gain the benefits of having a court order to protect them from harassment and the ability to have many debts legally discharged. However, these actions tie the hands of the creditors the business owes money to. They may be unhappy at being forced to agree to provisions as part of Chapter 11, and they may dislike the resources they will have to commit to ensuring the Chapter 11 process provides adequate relief for the debts owed.
As such, businesses that want to preserve friendly relationships with their creditors should first consider making a consensual party-to-party agreement — known as a workout. Additionally, the time and cost of Chapter 11 to the business itself should motivate business owners to attempt a workout before moving onto bankruptcy proceedings.
Benefits of a workout can include:
- Avoidance of stigma and preserving of business relationships
- Avoidance of potentially harmful disclosures
- Much simpler process
- Reduction of associated expenses
- Not being bound to decisions focused solely on repaying debt.
- Management has more time to focus on running the business.
- Reduce delays and roadblocks that could affect critical business decisions
Negotiating a workout can be complicated, especially if creditors are already threatening action or liens against your business. It can be beneficial to consult with an experienced financial law attorney team during this process to examine your situation, determine your strengths and weaknesses, identify priority debts, and begin negotiating with creditors towards everyone’s mutual benefits.
In the event that a workout cannot be arranged, individuals who have begun the process already have audited their debts and started speaking with creditors, preparing them in part for filing Chapter 11.
What Debts Are Discharged During Chapter 11 Bankruptcy?
“Discharged” debts mean that the debtor organization is no longer obligated to pay them, and the creditor attached to the debt can no longer pursue the debt from the organization that has completed the Chapter 11 process.
Debt discharge offers business owners a chance to start over. Most, but not all, debts incurred prior to declaring bankruptcy are dischargeable, including:
- Business debts
- Back rent
- Credit card bills
The discharge operates as a permanent order to the debtor’s creditors, preventing them from taking further legal action and communication with the debtor, including telephone calls, letters, and personal contacts.
Ultimately, the availability of discharge depends on the chapter under which the bankruptcy proceedings are conducted (Chapter 11 in the case of most businesses) and whether the debtor is a person or organization. One rule which applies in all chapters is that a debtor guilty of misconduct during the course of the bankruptcy proceeding will be denied a discharge.
Automatic Stay During Chapter 11
When the debtor organization first begins filing for Chapter 11, the court grants an automatic stay once the petition is received.
An automatic stay means that no creditor can take any action against the debtor. The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation.
Emerging from Chapter 11 Bankruptcy
Once the commitments formulated in the Plan of Reorganization have been satisfied, the company can emerge from Chapter 11 Bankruptcy, free from most debts, and start again to meet their goals and the obligations to their stockholders or owners.
Filers Keep Their Assets During Chapter 11 But Have an Obligation to Creditors
Under Chapter 11, the debtor (company) usually remains in possession of its assets and operates the business under the supervision of the court and for the benefit of creditors.
The debtor in possession (company) is a fiduciary for the creditors; this means that the business activities, for the most part, must be focused on satisfying the creditor’s liens on the company. If the debtor’s management is ineffective or less than honest, a trustee may be appointed.
During Chapter 11 Bankruptcy, a Creditors’ Committee Is Formed
One crucial consequence of filing Chapter 11 to consider — particularly for large business organizations — is that it grants creditors the authority to form a committee and vote on a plan for business restructuring and repayment of debt.
A creditors’ committee typically consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. The committee may consult with the debtor in possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan.
A creditors’ committee may, with the court’s approval, hire an attorney or other professionals to assist in the performance of the committee’s duties. A creditors’ committee can be an important safeguard to the proper management of the business by the debtor in possession.
After the order for relief, the debtor has 120 days to formulate and file a Plan of Reorganization with the bankruptcy court. If the debtor fails to submit a plan during the 120 day period, or if creditors fail to consent to the debtor’s plan during the first 180 days, any of the creditors can submit a plan. The court is sometimes faced with conflicting plans.
A plan of reorganization must designate classes and interests under the plan and what these classes of creditors will receive under the plan. For example, secured creditors might be one class, unsecured trade creditors a second, and employees a third. The plan must be fair and equitable and must provide an adequate means for its own execution.
Generally, all identified classes must accept the plan of reorganization by a majority vote in the number of claims and at least 2/3 in debt dollar value within each class. The bankruptcy court must approve the proposed reorganization plan after determining that it is in the best interests of the creditors.
Although each class of creditors must normally approve the reorganization plan, the bankruptcy court can still approve a plan over the objections of one or more classes of creditors. This power is called the “cram down” power.
The Chapter 11 Process May Differ for Small Businesses
In some smaller cases, the U.S. trustee may be unable to find creditors willing to serve on a creditors’ committee, or the committee may not be actively involved in the case. The bankruptcy code addresses this issue by creating a “small business case” somewhat differently than a regular bankruptcy case.
A small business case is defined as a case with a “small business debtor.” Determination of whether a debtor is a “small business debtor” requires the application of a two-part test.
- First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,000,000 or less.
- Second, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active and representative to provide oversight of the debtor.
Instead of a creditors’ committee, the small business may be subject to more scrutiny and filing requirements. They are expected to attach statements of operations and cash-flow statements to the petition, for instance. A U.S. trustee is also much more likely to get involved, including an “initial interview” to determine viability. They will monitor the small business’s activities to determine as promptly as possible if the filer will be unable to conform to the plan.
Because specific filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case typically proceeds more quickly than other Chapter 11 cases. For example, only the debtor may file a plan during the first 180 days of a small business case. This “exclusivity period” may be extended by the court, but only to 300 days only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time.
Getting Assistance From Chapter 11 Bankruptcy Attorneys in New Mexico
Bankruptcy laws are very complex. Errors or oversights made by creditors, individuals, or businesses can and do have significant, long-term financial effects. Because the court, U.S. trustee, and creditors’ committee exercise considerable authority over business decisions during the bankruptcy period, filers need a strong advocate and counsel to ensure their own interests are represented. They also want to be able to determine whether a restructuring and repayment plan will be viable, both in the short term and also in its long-term ramifications for the business’s future.
The Chapter 11 bankruptcy law firm you work with should be dedicated to clients and have considerable resources at its disposal for the purposes of analyzing your case and deciphering the best path forward. New Mexico Financial & Family Law has handled over 1,300 bankruptcy cases encompassing Chapter 7, Chapter 11, and Chapter 13. We can connect you with other trusted professionals to support you during the challenging process, including CPAs as well as mental health counselors.
You will want to select an Albuquerque bankruptcy law firm capable of giving you the full picture of the situation, understanding your options, and helping you navigate along the best path forward. If you are interested in obtaining these services or determining your available options, you can schedule a consultation and request a free information packet when you call (505) 503-1637 or contact us online.
We are a debt relief agency and have practiced bankruptcy law for a combined 50 years. Our services include helping individuals and couples file for bankruptcy relief under the Bankruptcy Code.