Should A Business Alert Its Creditors After Filing A Chapter 11 Bankruptcy?
In general, it is probably best to notify your creditors of your bankruptcy if you intend to do business with those creditors going forward. Instead of shocking them when they receive the notice of the bankruptcy, it usually goes over much better to have a conversation with the major creditors about why the bankruptcy is needed, what the results are going to be, and how you hope it will affect your dealings with that creditor.
Particularly with large lenders, the last thing you want to do is have them receive notice of the bankruptcy without you giving them some information. Doing that is likely to create hurt feelings and have that lender lack trust and faith that you will tell the lender what is happening and keep them informed.
If you want to do business with the creditors going forward post-bankruptcy, then you must establish a trusting relationship. It is a practical solution, not a legal one. You are not required to tell any of those creditors about your coming bankruptcy.
Does A Business Filing A Chapter 11 Bankruptcy Have To Continue To Pay Their Debts After They File?
Immediately after filing a Chapter 11 case, you may be able to obtain a reprieve from paying general business expenses for a period. But that’s only going to last for a short time.
As a part of any Chapter 11, you will need to become current on any debts because any creditors that bill you after your bankruptcy will have priority claims. They will get priority status and be paid ahead of your other obligations.
For your bankruptcy to be successful, any debts that arise post-petition after your bankruptcy filing will need to be paid. Otherwise, you will end up either having your Chapter 11 converted to a Chapter 7 and your business dissolved or being dismissed from bankruptcy, which will, in essence, result in the same end to the business.
Am I Allowed To Keep Running My Business As Usual After I File A Chapter 11?
Upon filing Chapter 11, you create an estate just like in Chapter 7 or 13, which consists of all the business assets as of the filing. Unlike Chapter 7, where a trustee is appointed who comes in and takes control of those assets, the debtor typically comes in as a debtor-in-possession.
This allows the debtor to continue operating the business. You would open new checking accounts and banking accounts as the debtor-in-possession. Then, you would continue to operate the company as the debtor-in-possession once you go forward.
Are Any Limitations Placed On The Debtor’s Right To Use, Sell, Or Lease A Property During A Chapter 11 Case?
The primary limitations you will be facing are on what you can do with the proceeds or other assets of the company that are secured by a pre-petition lien. Otherwise, there are very few restrictions on what the debtor-in-possession can do with the company and its assets post-petition.
Typically, the company can operate in the same manner as before after the filing. Still, the exception is for secured assets of the debtor on which a creditor holds a lien.
For example, consider that you own a company that makes widgets and sells them. Before bankruptcy, you would receive money for the sale of those widgets. Upon filing your bankruptcy, suppose you have a creditor that has a lien on all your inventory (i.e., your widgets). That lien will extend to any inventory or materials made from the inventory, including any proceeds from the sale of the widgets to third parties.
This means that you cannot use those widget sale funds post-petition without that creditor’s permission. Therefore, if you must use the cash from the sale of those secured items to continue operating the business, you will need permission from that secured lender to do that. The only alternative option is to obtain a DIP or debtor-in-possession financing from another source. Then, you can purchase more materials to create and sell those widgets – but you cannot use any of your pre-petition secured assets or proceeds absent consent.
For more information on Filing Chapter 11 Bankruptcy As A Business Owner, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (205) 506-3354 today.