Chapter 11 allows LLCs to reorganize their business by giving them more time to repay their debts. This helps the business carry on business as usual and the creditor is able to recover a portion of what is owed to them. Chapter 7, on the other hand, helps LLCs dissolve their business.
An LLC filing considering bankruptcy should consult with an attorney who is proficient and experienced in representing LLCs seeking protection Chapter 7 or Chapter 11. Take the case of Dynegy Holdings LLC, which sought protection under Chapter 11 recently (in October 2011). Per the latest developments in the case, a bond trustee has requested for an examiner to be appointed because Dynegy Holdings transferred coal-powered plant-related assets to its parent company before filing for bankruptcy, and its parent company did not file for bankruptcy. This could spell trouble for Dynegy Holdings – the case is still in its “hearing” stages.
This is just one example. There can be many nuances in any bankruptcy case, especially when in a LLC filing for bankruptcy under Chapter 11.
An LLC filing for bankruptcy should plan in advance and consult an expert lawyer before it moves forward and here are some of the steps it must take:
1.It must first learn if it is eligible to file for bankruptcy. Even a slight technical hitch can make it ineligible and waste months of effort. So, the first step is figuring out eligibility. If the LLC is not eligible, it must explore other options.
2.Next, the LLC should have a series of meetings with its lawyers and figure out the worst case scenario. It must take into account possible objections being raised by creditors, as in the case of Dynegy Holdings LLC, which is mentioned above – and plan to counter all objections by making a strong case.
3.Then it should cconsider which Chapter it will seek protection under. Chapter 7 spells liquidation while Chapter 11 helps the business reorganize itself. There are many factors involved here – number of owners, creditors, business scenario, financial forecasts, priority debts, clauses contained in the operating agreement, etc. – and the choice must be carefully made.
4.Once the bankruptcy process starts, then things take on a different hue. A case trustee appointed under Chapter 7 determines non-exempt assets and sells these and then pays off the creditors’ dues. Under Chapter 11, a committee of creditors votes on a reorganization plan submitted by the business owner/s. If the majority of the creditors votes in favor, then the plan is approved by the court and the company has to execute it per its terms.
5.After Chapter 7 bankruptcy process is complete, the LLC ceases to exist. After a Chapter 11 bankruptcy process is complete, the LLC becomes debt-free.
An LLC filing for bankruptcy must be ready for the long haul. Visits to the attorney, LLC bankruptcy filing process, meetings with creditors and addressing their concerns, and other court-related matters can stretch bankruptcy cases.
Other Business Bankruptcy Articles:
Business Bankruptcy
Bankruptcy Of An LLC (Limited Liability Company)