Posted: March 24, 2020
In the coming days, the protections and rights provided under Chapter 11 of the Bankruptcy Code are going to be critical tools to the long term survival of businesses. Chapter 11 is not reserved only for the large global corporations that garner media attention. Chapter 11 has long provided relief to mid-size and small businesses from what appears to be insurmountable debt. Chapter 11 allows business the opportunity to pay delinquent rent and/or secured lender payments over a term of years to preserve its revenue from attachment.
Upon the filing of a Chapter 11 bankruptcy petition, all actions pending by creditors (foreclosure, eviction, replevin, collections) are stopped and consolidated before the Bankruptcy Court. This is a significant right, as it provides protection of business assets and allows continued occupancy of the operational facility. Under Chapter 11, a business will file a plan of reorganization, which provides the ability to pay creditors the past due amounts over a term length of five years. There is a priority system, whereby secured creditors have the greatest right to payment, followed by taxing authorities, then followed by unsecured creditors (who often only receive a small percentage of the total debt owed.) Care must be taken however with unsecured creditors, who are often trade creditors whom provide products necessary for the ongoing survival of the business entity.
Under Chapter 11, a business has the ability to reject unexpired contracts. If a business has determined that it is impossible to perform under a contract, or if it is losing money by its continued performance, that contract may be rejected and terminated. The creditor related to the contract is, however, entitled to a rejection damage claim, which is calculated based on what the damages would be on the date of the filing of the petition, if the contract had been terminated. That rejection damage claim may be treated an unsecured claim, subject to a significant reduction of the actual amount that must be paid.
Chapter 11 is a complex legal process, with significant benefits for those in need. It is critical that you consult with an experienced bankruptcy lawyer to go over all of your options and to understand your rights.
For assistance with all Bankruptcy matters, please contact us:
Ken Kirschenbaum, Esq. (516)-747-6700 Ext. 301 or ken@kirschenbaumesq.com
Stacy Spector, Esq. (516)-747-6700 Ext. 304 or sspector@kirschenbaumesq.com