The bankruptcy laws provide for Chapter 11 bankruptcy, which is used primarily to rehabilitate a business debtor. Chapter 11 allows a debtor to enter into an agreement with creditors under which all or a part of the business continues. The debts of the business are restructured so as to allow the debtor to continue his business operation and make payments based on a plan of reorganization.

Chapter 11 is more complex than Chapter 12 or Chapter 13, but it may provide an option for those farm operators or individuals whose debts exceed the limits imposed by Chapters 12 and 13. Its provisions are quite complicated, and any decision to file a Chapter 11 petition should be reviewed and planned out with an attorney extensively before filing.

What Can You Expect During Your Chapter 11 Bankruptcy?

A. The objective in a Chapter 11 case is to adjust and reorganize a debtor's obligations so as to allow the business to continue.

B. To initiate a Chapter 11 case, a voluntary petition is filed with the court. A schedule of assets and liabilities and a statement of financial affairs also must be filed.

C. In most cases, the debtor - known as the “debtor in possession” once the case has begun - remains in possession of his property, develops a plan, and generates funds to pay his debts.

D. Generally, a trustee is not assigned to the case unless there is evidence of fraud or mismanagement.

E. A committee of creditors will generally be appointed to oversee the business operation under the supervision of the debtor in possession once the case has been initiated.

Can I Still Use the Business Funds While in Bankruptcy?

Generally a debtor may continue to use assets in the ordinary course of business without court approval. There are, however, certain restrictions on the debtor’s use of cash collateral. The debtor in possession cannot use, sell, or lease "cash collateral" unless each creditor with an interest in the collateral consents or unless the court authorizes such use. To obtain court permission to use cash collateral, such as proceeds of stored grain, milk proceeds, the proceeds of livestock sales, or other business income, the debtor in possession must provide any creditor who holds a lien on such property with adequate protection. In other words, the creditor's secured position must be protected and not harmed by the use of the creditor's collateral.

Is the Business Authorized to Borrow Funds While in Bankruptcy?

The debtor in possession is authorized to borrow funds. He may obtain unsecured credit in the ordinary course of business without court approval. And he may obtain secured credit by granting a lien on unencumbered property of the estate or a subordinate lien on encumbered property with court approval. Finally, if the debtor cannot obtain credit on either an unsecured basis or by using previously unencumbered assets, a super priority lien may be obtained if he can establish that any lender who also has a lien on the property will be adequately protected.

Our Attorneys Who Practice Business Bankruptcy

  • Paul G. Swanson
  • Douglas K. Marone
  • Julie E. Furman Stodolka
  • John W. Menn