Business Bankruptcy

A business bankruptcy is most often a voluntary legal proceeding filed by a financially troubled company seeking protection from its creditors. Two types are available - a Chapter 11 filing brought to financially reorganize or restructure the business, and a Chapter 7 filing seeking to liquidate the business. On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). BAPCPA made significant changes to the bankruptcy code.

Bankruptcy can indeed be a valuable tool for a financially troubled company. Yet the expense, operation and administration of even a modest Chapter 11 case can be daunting for a small or medium size business with just a few creditors. Other options should therefore be investigated. Debt relief may sometimes be accomplished through negotiating extended payment arrangements with particular creditors or through assignments for the benefit of creditors, composition agreements or litigated or non-judicial workouts. If you believe your business is financially troubled and might benefit from creditor protection, it would be wise to seek legal advice from an attorney experienced in debtor/creditor rights matters and bankruptcy at the earliest possible time.

Business bankruptcy often involves crisis management. Exigent circumstances create many challenges and choices, very often requiring immediate decisions and nerves of steel. For this reason, management should obtain professional guidance and counsel.

A Chapter 11 filing typically permits management and owners of a financially distressed business to continue operating the business under the protection of the bankruptcy court without outside interference from creditors. Immediate attention must often be given to retention of professionals, continuation of banking relationships and availability of credit, as well as resolving prepetition payroll issues. In addition, after notice and a hearing, the bankruptcy court may allow the debtor to sell off unprofitable assets or reject burdensome leases, and other steps may be pursued to control costs.

The debtor is generally given 120 days to file a plan of reorganization for creditor consideration and vote. The debtor normally uses this time to negotiate the plan of reorganization with its secured and unsecured creditors. The plan of reorganization most often provides for partial payment of unsecured debts over time. Creditors or other parties may file competing plans. A Chapter 11 filing works well for a business behind in its unsecured debt payments, with some cash on hand and a regular cash flow. In theory, given enough breathing room and sufficient opportunity to operate without worrying about paying old bills the debtor hopes it will be in a position to reorganize its financial affairs through the confirmation of a Chapter 11 plan. Its prospects will be enhanced by projections of future profitability or the identification of an investor or evidence that the debtor can realize on its going concern value.

The purpose of a Chapter 7 bankruptcy, on the other hand, is to liquidate the business debtor's assets. Upon the filing of a Chapter 7 bankruptcy a trustee is appointed to take charge of the debtor's business. The trustee may continue to operate the business for a short time or, more typically, take steps to close the doors and immediately collect, market and sell off the assets. The trustee's job includes the collection of all real and personal property, including cash, accounts receivable, pending lawsuits, sale proceeds, inventory, valuable leases, and rights of action, including voidable preferences and fraudulent conveyances.

If you would like more information concerning business bankruptcy and its alternatives, please contact the firm via e-mail or by calling 212.684.7800 or 201.794.7500.

New York Office
Phone: 212.684.7800
New Jersey Office
Phone: 201.794.7500

For further information on this topic or to discuss your case, please contact Richard E. Weltman or Michael L. Moskowitz by telephone, fax or email.

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