Advantages of Chapter 11 reorganization

The bankruptcy code provides numerous benefits to debtors who seek reorganization under chapter 11. Below is a partial list of some of the most common benefits.

Automatic stay: By operation of law, the filing of a chapter 11 petition automatically stays virtually all lawsuits, foreclosures, repossessions, bank levies, wage garnishments and other collection activities. The automatic stay is immensely helpful for debtors who are facing aggressive collection action by creditors. The automatic stay is the first step in reorganization.

Avoidance and recovery of certain involuntary transfers: Once a debtor is in bankruptcy protection, the debtor can avoid and recover certain bank levies, wage garnishments, lien notices, even repossessions of vehicles or equipment that occurred prior to the filing of the bankruptcy.

Preservation of a going concern: Debtors that are operating a business can continue business operation in a chapter 11. This means that the business name, goodwill, and customer base is not lost.

Temporary deferral of obligations incurred pre-petition: While in a chapter 11 reorganization, debtors may be able to temporarily defer making certain rent or installment debts.

Adjustment of interest rates: Debtors can use the reorganization process to adjust certain interest rates. For example, excessively high interest rates on loans secured by commercial equipment, vehicle, or certain real estate can be adjusted downward.

Cure defaulted or accelerated obligations: Debtors can use the chapter 11 process to cure defaults on obligations such as mortgages or leases.  Often, when a borrower defaults on legal obligations, the lenders “accelerate” that obligation. This means that the lender asks that the entire amount of the debt be paid in one lump sum payment. Debtors in chapter 11 reorganization may be able to cancel the debt acceleration, and return the obligation to pre-default status.

Assume or reject executory contracts and unexpired leases: Debtors in a chapter 11 reorganization may be able to “pick and choose” those equipment leases, real estate leases, or other long term (or “executory”) contracts they wish to maintain. Debtors can reject any contract that they believe is not economically profitable.

Sell property free and clear of liens and interests: Debtors can use the chapter 11 process to sell assets that are encumbered by liens. The chapter 11 court has authority to allow a buyer to purchase those assets free and clear of the encumbrances.

Extend payment of unsecured tax debts: The bankruptcy code allows Debtors to use the chapter 11 reorganization process to extend payment of unsecured tax debts for up to five years.

Borrow post-petition: Debtors in chapter 11 reorganization may be able to borrow money while in reorganization in order to finance their reorganization.