New Proposals for Chapter 11 Bankruptcy from the American Business Institute

Nyack Bankruptcy Attorney

This year, Chapter 11 bankruptcy is getting an overhaul. These changes are designed to make filing for Chapter 11 bankruptcy easier for businesses.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a type of bankruptcy that is reserved for business entities. With this type of bankruptcy, a business owner must reorganize his or her company to pay back the company’s creditors.

Businesses may file for one of the following three types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13. Each is designed for filers with different circumstances. Chapter 13 bankruptcy is generally meant for individuals who can get into a repayment plan to reduce their personal debt levels, but sole proprietorship companies may also take advantage of this option.

If a business has no hope of recovering from its financial woes, its owner may opt to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy is available to individuals and businesses whose debt is insurmountable. By filing for Chapter 7, these businesses and individuals eliminate their debts by liquidating their assets under the supervision of a court-appointed trustee.

Owners who want to continue to operate their businesses but need to reorganize their operation in order to do so may file for Chapter 11 bankruptcy. Chapter 11 bankruptcies can be complex, but for many business owners, they are the saving grace their company needs.

How Does Chapter 11 Bankruptcy Work?

When a company files for Chapter 11 bankruptcy, it must submit its plan for reorganization to the court. The company’s creditors then vote on the plan. If the court and creditors approve of the company’s bankruptcy plan, the court assigns a trustee to guide it through the reorganization process. This process can take 20 years or even longer in some cases. If the court does not approve of a company’s bankruptcy plan, the company must write a new plan and resubmit it to the court for consideration. For many companies, getting a plan submitted and approved by the court can take a year or longer.

Big Changes Ahead for Chapter 11

After two years of research, the American Bankruptcy Institute submitted its proposal for ways to make the Chapter 11 bankruptcy process less stressful for companies. The proposal can be summarized in four points:

1. Narrowing Applicability to Leveraged Buyouts.

These changes include the narrowing of Section 546(e)’s applicability to leveraged buyouts. Section 456(e) provides a safe harbor for certain securities-related transfers. A safe harbor is a statute that deems certain actions are not in violation of a given rule. With the changes to Chapter 11, the protection of settlement payments written into Section 456(e) has a more narrow scope than it did under the old rules. Talk to your attorney about how the recently-narrowed scope will affect your company’s bankruptcy settlement.

2. Narrowing of the Repo Safe Harbors, Especially with Regard to Mortgage Financing.

Another newly-narrowed safe harbor is the one that regulates repos, or the state of securities with the promise to purchase them back at a slightly higher price.

3. Conforming the Bankruptcy Code to the Federal Deposit Insurance Act and the Dodd-Frank Act’s Orderly Liquidation Authority Standards.

The Federal Deposit Insurance Act bolstered the Federal Deposit Insurance Corporation (FDIC) to insure deposits by banks and other savings associations. This act also determines the activities that insured state banks may participate in and the penalties for individuals who unlawfully engage in related activities.

The Dodd-Frank Act is a recent act that was created in response to the 2008 recession.

4. Making it Clear That the Safe Harbors Should Not Apply to Ordinary Supply Contracts That Don’t Involve Financial Institutions.

How Can These Changes to Chapter 11 Bankruptcy Affect New York Small Businesses?

These changes protect junior creditors from losing money through haphazard restructurings based on low valuations. These changes also give bankrupt companies extra time after filing their bankruptcy petitions to work out their financing and sales. This makes it easier to obtain financing during the bankruptcy process. Additionally, these proposed changes create an alternate path for small and medium-sized businesses to reorganize their operations.

Contact A Nyack Bankruptcy Lawyer Today

If you are a New York business owner facing bankruptcy, contact an experienced Nyack bankruptcy attorney at the Law Offices of Robert S. Lewis, P.C. at 845-358-7100 today for your free legal consultation. As one of Rockland County’s premier bankruptcy attorneys, Robert S. Lewis can guide you through the Chapter 11 bankruptcy process and toward a better financial future for you and your company. Don’t wait to make the call – contact our firm today to discuss your case with us and learn more about the options available to you.