Many people believe that they need an attorney to guide them through a Chapter 11 business bankruptcy when they are the party who is filing business bankruptcy. Very often, however, it is those who are in jeopardy of not being paid what is owed who need the expertise of a bankruptcy attorney who can represent them in a Chapter 11 business bankruptcy matter.
Who needs to consult a bankruptcy attorney for a Chapter 11 business bankruptcy?
When a business files for bankruptcy, there are several types of parties who have claims against that person or business. It can be a claim for a loan, materials and supplies or any other asset that is in jeopardy of not being paid. These claimants have a right to seek to recoup what they have brought to the business that is filing a chapter 11 business bankruptcy, and they can benefit from seeking out an attorney who specializes in this area of law.
There Are 3 Main Types of Claimants in a Chapter 11 Business Bankruptcy
- DIP (Debtor-In-Possession) lenders
- Parties buying assets out of a bankruptcy estate
There are two types of creditors: secured creditors and unsecured creditors. It is important to understand the difference, not only when the loan or asset is first given to the business, but to understand what the process is if a business defaults due to a Chapter 11 business bankruptcy.
Secured Creditor: This is when a person or company holds a lien on property of a business. This can be real estate property or some other physical asset, such as machinery, equipment, furniture, etc. In effect, the secured creditor owns some rights to reclaim the assets held by the business and is guaranteed to get a payout should the business default. If the business files for Chapter 11 business bankruptcy, the secured creditor has a priority position in the debt collection process, so they can recoup their assets should the business default.
If a business defaults on their loan, a secured creditor cannot simply reach out to the business and try to collect their assets. There are specific filings that need to take place in court to make the collection process legal and binding and to ensure that the creditor receives what they are due. By officially notifying the debtor of your intention to collect, the debtor has a certain amount of time to reply to reaffirm that they intend to pay the debt or to state if they cannot pay the debt. It is important to have the proper legal counsel to walk you through the process and represent your interests in court because if you miss the timing of the filing, it can impact your ability to hold a debtor to his obligation.
Unsecured Creditor: these companies do not have the same priority of debt collection as the secured creditors. They may consist of a credit card company, bank or supplier. It is very possible that these creditors will need to negotiate some form of reduced payment or delayed payment over time to recoup their debt.
The biggest issue for an unsecured creditor is how and when they will be compensated for the debt owed to them. Because they have not negotiated up front to be a secured creditor, they are not going to be first in line to recoup assets or have debts paid once a chapter 11 business bankruptcy is established. They may end up receiving a small portion of what is owed or receive compensation over an extended period of time. It is important to consult with an attorney who can understand the rights you do have as an unsecured creditor and negotiate a better settlement for you.
DIP (Debtor-In-Possession) Lenders
In some cases, it makes more sense for a company to hold onto assets, such as property, inventory and machinery to keep their business running while they have filed for Chapter 11 business bankruptcy. This can benefit all parties involved because debts can then be paid back in full. Debtor-In-Possession (or DIP) are typically companies who have sold equipment or real estate with a lien against it and have agreed to allow the business to continue to hold the asset while they go through the bankruptcy process.
Most of the time, a DIP Lender arrangement is meant to be a transitional stage in the overall bankruptcy process. The Debtor-In-Possession can utilize the assets to keep their business afloat in order to provide more funds to help with paying debt or liquidating other assets as the business winds down.
The DIP Lender has to keep a close eye on what the DIP is doing with their business so as to understand if or when they might need to exercise their right to reclaim the assets should the business not be able to meet their obligations. A bankruptcy attorney will monitor the ongoing business dealings and process to best represent the interests of the DIP Lender.
Asset Purchase During a Bankruptcy
When a debtor decides to file a Chapter 11 business bankruptcy, they can either sell off some or all assets to satisfy their creditors or they can reorganize their business to salvage it. Either way, it is often the case that the debtor will need to file with the courts the assets that they are looking to sell.
If you are a company who is interested in purchasing assets from a company who is in the bankruptcy process, it is not as easy as just purchasing those assets. There are court orders to establish a sale price, which assets can be sold rather than given back to a creditor, and which buyers have already been identified for a purchase (typically this happens with a reorganization or buyout of a company).
In some cases the Debtor may simple sell its various assets like equipment, inventory or accounts receivable. Other times the debtor may sell its business operation including things like its brand name, customer lists and files, work force in place and supplier connections.
Some asset purchasers want to dismantle the current company and realign as part of a reorganization. This can be done as a part of an acquisition or merger, and there are specific laws regarding how best to make sure secured creditors and DIP lenders are accurately compensated during the buyout process.
Bankruptcy Court Filings and Approvals Are Key to Any Chapter 11 Business Bankruptcy
Regardless of whether you are a secured creditor, unsecured creditor, debtor-in-possession lender or asset purchaser, working within the rules of a bankruptcy court is crucial to the success of your relationship with the debtor and getting the results you are looking to achieve.
There are certain bankruptcy court filings that need to be addressed in making a request of the bankruptcy court to get approval for asset sales, purchases, or to recognize the liens you may have over a company’s assets. During this process, there will likely be one or more hearings to discuss the matter, and a Houston bankruptcy attorney knows exactly how best to approach the hearing, which forms to file during a specific timeframe, and how best to represent your interests.