After careful consideration, a business owner might determine that filing Chapter 11 bankruptcy is the right path for them. It will allow them to keep running their business operations but help them relieve their debt as well.
One essential aspect of filing Chapter 11 bankruptcy is creating a plan for reorganization. In this plan, business owners clarify how they will address the debts they owe.
However, when creating this plan, it is critical that business owners understand the elements that the court will factor in when they consider whether to approve the plan or not.
1. Is the plan realistic?
The purpose of the reorganization plan is to help a business succeed while repaying debts. So, the plan itself must succeed as well, and it must be practical. Courts and creditors will only approve a plan for reorganization if they determine that it will actually work.
California business owners must prove that they:
- Can generate enough funds to repay debts
- Will have enough funds to pay current business expenses
Often, an experienced bankruptcy attorney and creditors can work with business owners to help make a plan that meets both the business owner's ability to pay and creditors' required repayment.
2. Will the plan properly pay the creditors?
Courts and creditors will not approve a plan if it is not in the best interest of the creditors.
This may not sound very fair to business owners, but Chapter 11 bankruptcy serves to:
- Pay debts first and foremost
- Help a business continue and succeed second
This does not necessarily mean that the plan must require the business owner to pay all debts in full. Most business owners can repay a portion of their debt and still meet a creditor's best interests.
3. Is the plan made in good faith?
This is a crucial factor of any bankruptcy filing. Business owners must prove that they propose their plan for reorganization in good faith. This includes proving:
- The intention to repay the debts and not just delay payments
- That the business owner needs debt relief
- That the business owner did not exclude any financial information in their filing
The court will dismiss any plans and bankruptcy filings made in bad faith. And that could lead to more significant penalties that a business owner must pay in addition to debts. Considering these factors while creating a plan for reorganization can help business owners create an effective plan to guide them through bankruptcy.