law

What to Expect When a Company Files for Chapter 11 Bankruptcy

Companies that choose to file a Chapter 11 bankruptcy can reorganize and make a plan to repay their creditors. They can continue to operate their businesses; however, a bankruptcy court should approve their financial decisions such as paying off creditors. Thus, their cash flow can be severely affected. For instance, the past-due invoices of clients may eventually be paid but not be in full. Regardless, a Chapter 11 bankruptcy allows a company to Press The Restart Button, so it can reorganize and plan for ways to become profitable. 

Continuing Operations After Bankruptcy Filing

When a company files for Chapter 11 bankruptcy, it can continue to operate its business normally. Thus, it can still buy essential goods and services it needs for running the business. Often, these purchases get administrative claim status and should be paid by the company although the accumulated debts before the filing are held until the confirmation of the restructuring or liquidation plan and when the payment is approved by the court. 

Cash Collateral Orders

A company that continues to operate its business after filing for Chapter 11 bankruptcy may bring in funds from its accounts receivables or inventory and property sale. It places this income in a cash collateral account and has to seek a court order before it can use the cash. 

Evaluating Creditworthiness

A Chapter 11 business bankruptcy allows a company to reorganize. During such a period, there will be a regular change to the cash flow of the company. Companies in Chapter 11 should give monthly reports and summaries of their operations to the bankruptcy court. These reports include receipts and disbursement statements, cash-flow statements, balance sheets, tangible assets, post-petition debts, and account receivable schedules. 

Those that want to do business with a company that has filed for Chapter 11 bankruptcy should carefully review its monthly operations to determine its creditworthiness. This is necessary to protect their own cash flow. 

Asset Sales

Chapter 11 gives a company a chance to stop paying its creditors while planning to reorganize its business and become profitable. This can help the company maximize value for its creditors. But it might be necessary to sell the business or its assets. When this happens, the company or the committee of creditors will organize the way creditors are paid using the proceeds of the sale. All creditors are not guaranteed to be paid or paid in full. Should the company be sold, the new owner will deal with the debt it previously owed.