A business that files a Chapter 11 bankruptcy must understand that there will be immediate impacts, both beneficial and restrictive, once the case is filed. The bankruptcy code, rules and the Court’s local rules place several requirements that both the business and creditors must follow. These requirements range from small administrative rules to significant legal impacts. The following are some of the most important impacts that a business should expect upon filing a Chapter 11.
The Automatic Stay
When a Chapter 11 bankruptcy case is filed, an automatic stay becomes effective. For a business, this means that all creditors must stop all collection actions. Bank attachments, foreclosures, repossessions, rent assignments, etc. must stop immediately when the bankruptcy is filed. No creditor may attempt to collect money from the business or take any action against the property of the business once the bankruptcy is filed. This includes any action taken by the government to collect delinquent taxes. A creditor must seek the Court’s permission to take any of these actions once the bankruptcy is filed.
A business that files Chapter 11 may not use money to operate that is subject to the lien of a creditor without the Court’s permission or consent of the creditor. Creditors often have liens on the business receivables, rents and inventory proceeds. One of the first actions taken in a Chapter 11 is to seek permission to use that money to keep the business operating. Most Courts will hear these requests on an emergency basis. The Court may approve the use of the cash temporarily and require the business to abide by an approved budget during that time. The Court may require the business to make payments to the creditor for use of the cash.
Payment of Pre-Petition Debt
A Chapter 11 bankruptcy prevents a business from paying pre-petition debts without the Court’s permission. Pre-petition debts will be paid through the Court approved plan unless otherwise ordered. This requirement can place a hardship on the business particularly if a reliable vendor is owed money. The business should be prepared to seek another vendor in such a situation. In some unique circumstances, the Court may grant permission to pay a vendor pre-petition debt.
Pre-Petition Wages and Benefits
If a business has employees that are owed wages and benefits at the time of the Chapter 11 bankruptcy, those employees are pre-petition creditors. This includes employees that had their first paycheck withheld. These employees cannot be paid pre-petition wages unless the Court permits. Courts will typically allow the business to pay pre-petition wages if it does not exceed a certain amount.
Sale of Property
A business in Chapter 11 bankruptcy can sell any of its inventory and assets if the sale is in the ordinary course of business. The bankruptcy code and rules contemplate that a business in Chapter 11 will want to continue doing business by selling its normal products. For example, a shoe store can continue to sell shoes. On the other hand, a shoe store cannot sell the shoe display equipment without permission of the Court. A business should remember that if a lien is on inventory that is sold that lien will transfer to the proceeds generated from the sale.
Payment of Officers
In Chapter 11 bankruptcy, a business is not permitted to pay its officers, members or directors any compensation without permission of the Court. Some Courts have local rules that allows compensation to be paid while the application to the Court is pending for officer compensation. For example, the Eastern District of North Carolina allows an officer to be compensated for one-half month if the application for approval is pending.
There are many more administrative rules that must be complied in the first couple weeks of a Chapter 11 bankruptcy. The above is just a few of the major first day rules of Chapter 11 bankruptcy.
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Dealing with financial complications can be overwhelming. C. Scott Kirk can help advise you during these stressful circumstances. If you have additional questions regarding bankruptcy, contact C. Scott Kirk, Attorney at Law, PLLC by calling (252) 689-6249 to schedule your personal consultation. You can learn more at csklawoffice.com.