When a small business files for bankruptcy under Chapter 11, the business gets a new status under the bankruptcy code, and the operating business technically becomes a new entity; it becomes the “debtor in possession.” The debtor in possession acts as its own trustee under Chapter 11, which means that—barring the appointment of an examiner or a replacement trustee due to some wrongdoing by the debtor—the debtor in possession operates its business. There are some limitations here, such as the use of cash collateral or cash proceeds for the operation of the business (there would need to be approval or some sort of agreement with a lender to allow for this to happen). But, in general, the debtor operates the business almost the same as before the bankruptcy. However, certain requirements will need to be met to do that, which will require some effort. For example, there may need to be an agreement from secured lenders, a new secured lender, or some other source of operating funds that does not involve a secured lender’s pre-petition cash collateral.
After filing for bankruptcy, the hope is that you will see a business proving it can operate efficiently now that it has less debt than before the bankruptcy. From an economic perspective, lenders are likely to see a debtor who is better off financially and more bankable than before the bankruptcy.
That said, the business owner will always have to answer some questions and deal with the realities of having been through a bankruptcy. For instance, lenders will want to know what is going to be different moving forward, which is pretty simple to explain: The debt that was dragging down the company has been cleared, and the business still has a revenue-generating engine that is able to not only survive, but thrive without the debt.
On the personal side, it may be a little more difficult to obtain loans, but on the business side, lenders are savvy and likely to understand that a business that survives the Chapter 11 process reorganized without the same debt is a better risk for that lender than the pre-bankruptcy debtor.
Finding Footing, And Maintaining It In The Post-Bankruptcy Phase
The best way for a business to regain footing and—perhaps more importantly—maintain that footing is by setting the table with their lenders and contract partners as to what they can expect to happen with the bankruptcy and how the business is expected to look after the bankruptcy. This calls for substantive and useful conversations between the debtor and the debtor’s creditors and lenders.
Post-petition the debtor will open a new bank account to operate as the debtor in possession. The funds of the pre-bankruptcy entity will be left in the existing accounts so that the debtor is not using cash collateral or cash proceeds that belong to a lender. Otherwise, beginning on the first day following the bankruptcy, the debtor will operate just as they did on the day before bankruptcy.
If the creditors and lenders are stubborn or are otherwise creating a difficult situation, then there may be first-day motions which will address some of the material issues on the first day of bankruptcy. The goal is for the process to run as smoothly as possible so that not much changes operationally in the post-bankruptcy stage.
For more information on Aftermath Of Filing A Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (205) 506-3354 today.
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