Navigating the complex process of business bankruptcy is daunting, even to the most savvy entrepreneurs. As a business owner, you have invested time and resources in your business and have reached a point where you are uncertain as to how to proceed. Even when conducting online research regarding the question “How does business bankruptcy work in Maryland?” you are most likely confused about the information that you find, which may be inconsistent and confusing.
At Steiner Law Group, one of the most common questions we are asked is “How does business bankruptcy work in Maryland?”
In this post, we are going to delve into how Chapter 11, Chapter 7, and Chapter 13 business bankruptcy work, and describe the processes and implications so you can make an informed decision about how to proceed with your business.
Table of Contents
What is Business Bankruptcy?
Business bankruptcy is a legal process for businesses that are unable to repay their debts, providing a pathway toward financial restructuring through a plan of reorganization or liquidation. Business bankruptcy is a complex and intricate process that is jurisdiction-specific. Although a common misconception, bankruptcy doesn’t necessarily mean losing your business or terminating employees. Neither is it a declaration of failure or irresponsibility. Rather, it can be a strategic move for businesses facing overwhelming financial challenges.
Bankruptcy is not exclusive to large corporations, nor is it unfeasible for small businesses. With experienced legal counsel, businesses of any size can address their debts, turning a hardship into an opportunity for repayment, restructuring the business, or liquidating the business through a court-overseen process.
Types of Business Bankruptcy
Chapter 11, known as “reorganization bankruptcy,” is used by Corporations, Limited Liability Companies (LLCs), and Partnerships, each of which has its own nuances. Chapter 11 allows businesses to restructure debts under court supervision while continuing to operate as a debtor-in-possession. With effective legal counsel, Chapter 11 can allow a company to re-emerge as a profitable entity.
Chapter 7, often referred to as “liquidation bankruptcy,” involves the liquidation of a company’s assets, if any. Once completed, the business ceases operations and the entity no longer exists. This chapter of business bankruptcy is typically best suited for business owners who have made the difficult decision to shut down their business.
Chapter 13 applies to sole proprietorships, an entity structure that does not provide the business owner with limited liability. Chapter 13 business bankruptcy allows the owner to maintain assets while repaying debts over 3-5 years, based on a Chapter 13 plan.
Which Type of Bankruptcy is Best for My Business?
Choosing the type of bankruptcy best suited for your needs can depend on your company’s financial situation and future goals. Chapter 11 can be a suitable option for businesses that are earning revenue but are unable to meet their debt obligations. Chapter 7 bankruptcy provides a court-overseen process to shutter the business while preventing creditors from seizing business assets piecemeal. Chapter 13 can be utilized by sole proprietorships to provide a simplified process for success.
An experienced business bankruptcy attorney can advise you about these options, so you can make an informed decision on how you wish to proceed.
How Chapter 11 Bankruptcy Works, Step-By-Step
The answer to the question, “How does business bankruptcy work in Maryland?” is different for each chapter of business bankruptcy. Chapter 11 business bankruptcy is suitable for businesses that want to continue operations and can develop a plan on how to do so. However, Chapter 11 is a complex and involved process. Because of this, retaining a knowledgeable bankruptcy attorney is critical so that your business stands the best chance of emerging out of Chapter 11 as a viable and profitable venture.
Step 1: Consult a Business Bankruptcy Attorney
Filing Chapter 11 bankruptcy for your business is not an easy decision and should not be taken lightly. Consulting with a business bankruptcy attorney allows you to deduce whether or not bankruptcy is your business’s best path forward.
A bankruptcy attorney can assess your business’s financial situation and provide an overview of the Chapter 11 process so that you can make an informed decision on how to proceed.
Step 2: Obtain and Provide the Necessary Documentation to Your Attorney
After retaining an attorney, you have some work to do. Bankruptcy is a document-heavy process. Your attorney should review this documentation to assess your business’s assets, liabilities, and financial affairs. All chapters of bankruptcy are document-heavy and tell a story about your business.
Step 3: Formulating a Chapter 11 Plan
In formulating a strategy to give your business the best chance of having a successful Chapter 11, you should work closely with your counsel to establish a framework for success, which is dependent upon numerous factors.
First, a comprehensive analysis of your company’s debts and obligations is undertaken. Each liability-from secured loans to supplier contracts-is carefully examined to determine how these debts may be able to be restructured. Next, you will list and value your business assets. Non-essential assets may be identified for sale to generate liquidity and reduce liabilities.
Your attorney can also assess your business operations for profitability and efficiency. For example, it may be necessary to streamline processes, cut costs, or even adapt your business model. Transparent communication with employees, suppliers, and creditors is critical to maintaining smooth operations during this period. By formulating a Chapter 11 strategy, you stand a better chance at successful reorganization, paving the way for sustainable operations after the plan is confirmed.
Step 4: Preparing the Petition and Schedules
In this phase, your attorney puts together the bankruptcy petition and corresponding schedules. This comprehensive process requires an in-depth exploration of your business’s financial status and includes:
- A list of your business’s assets. This comprises physical assets like property, equipment, and intangible assets such as intellectual property and outstanding invoices.
- An account of your business’s liabilities. This encompasses secured debts such as mortgages, unsecured debts like credit cards, tax obligations, and obligations to suppliers or service providers.
- An exhaustive list of your income and expenses. This includes all revenue streams and operational costs.
- A diligent examination of your business’s financial transactions from the previous several years to ensure there are no transfers that could complicate the proceedings.
Step 5: Filing the Petition
Once the bankruptcy petition and schedules are completed, your attorney will review them carefully and file the case with the Bankruptcy Court, commencing the Chapter 11 process. Upon filing, the “automatic stay” is immediately triggered. The automatic stay pauses any ongoing collection activities from creditors, providing protection from creditors so that you can reorganize your business’s finances without the pressure of collection actions.
The timing of when to file for bankruptcy is critical because it can significantly influence the extent of your financial relief. Filing at the right time can protect more assets, manage immediate crises, and provide a strategic edge for your business’s recovery.
Step 6: Initial Debtor Interview (IDI)
The next step is the Initial Debtor Interview (IDI). This meeting involves a conversation between the debtor and a United States Trustee Analyst.
The primary aim of the IDI is to educate the debtor on its responsibilities in its new role as a ‘debtor-in-possession,’ as the debtor maintains control of its assets during the reorganization process. The debtor must operate its business transparently and has a fiduciary duty to their creditors, ensuring that assets aren’t unfairly liquidated or dissipated.
The IDI also provides an opportunity for the debtor to clarify any queries about the process, timelines, and requirements under Chapter 11. Additionally, it addresses administrative details such as Monthly Operating Report requirements and quarterly U.S. Trustee fees. In summary, the IDI is designed to ensure that the debtor is fully informed about its role and responsibilities, and is informed on how to navigate Chapter 11 proceedings effectively.
Step 7: 341 Meeting of Creditors
After the Initial Debtor Interview comes the 341 Meeting of Creditors. During the 341 Meeting, the debtor, the attorney, and the United States Trustee convene. Creditors are also allowed to attend and ask questions about the bankruptcy paperwork. The primary purpose of the 341 meeting is to allow creditors and the United States Trustee to ask the debtor questions about financial conditions and the bankruptcy petition and schedules. It also provides creditors with an opportunity to better understand the debtor’s financial situation.
The debtor, under oath, must answer truthfully and in detail about the business’s financial affairs, the nature of its assets, and the scope of its debts. Your attorney will be present for the meeting to ensure that all questioning stays within appropriate bounds and to make objections if needed.
Step 8: Claims and Objections
In this stage, creditors formally assert the amount the debtor owes them by filing ‘proofs of claim‘. Although the amounts listed in Schedules D, E, and F are binding upon the debtor, claims set forth the nature and amount of the claim and provide necessary information which may ultimately be incorporated into a Chapter 11 Plan. You and your attorney will carefully review these claims to ensure that each one is accurate, lawful, and legitimate. Your attorney will also assess if there are discrepancies or if a claim seems improper. For instance, if a creditor claims a larger sum than you assert is owed, or the creditor claims a secured debt that is unsecured, you have the right to object.
To illustrate, suppose a creditor submits a proof of claim stating the business owes it $100,000 secured by equipment, but your records indicate you only owe $80,000 and the equipment was previously sold. In this case, your attorney would file an objection to this claim, disputing both the amount and the secured status. The Bankruptcy Court will then schedule a hearing to resolve any objections, ensuring fairness for all parties.
Step 9: Draft and Revise Chapter 11 Plan of Reorganization
You have an exclusive 120-day period, known as the ‘exclusivity period,’ to file a Chapter 11 plan. This plan provides the business’s roadmap to financial recovery. The plan separates creditors into different classes and a payment schedule for each class. The Chapter 11 plan isn’t a simple debt repayment schedule, rather it’s a comprehensive strategy that encompasses various facets of the debtor’s operations and finances.
For example, the plan may propose restructuring the company’s operations to increase efficiency and profitability. This could involve cutting costs or liquidating non-essential assets. Payment terms with creditors are often modified in the plan. For instance, a debtor may propose to repay a $1 million unsecured debt over ten years and to pay arrears on secured debt over 20 years.
The plan must meet the requirements of the Bankruptcy Code pursuant to 11 U.S.C. § 1123. This includes feasibility, providing adequate means for the plan’s implementation, and containing only provisions that are consistent with the interests of creditors. The initial drafting of and subsequent revisions to the plan often involve negotiations with creditors and shareholders. If creditors oppose the plan as unworkable or unfair, they have the right to object to the plan or file a competing plan, and a judge may deny the plan and require revisions.
The Chapter 11 plan of reorganization is the cornerstone of the Chapter 11 process the guiding document that charts the course for the business to navigate out of financial distress and into calmer waters.
Step 10: Draft and Revise a Disclosure Statement
Often prepared simultaneously with the Chapter 11 plan of reorganization, the debtor is required to prepare a disclosure statement, which is a detailed financial catalog that provides creditors and other interested parties with extensive information about the debtor’s financial condition and the feasibility of the proposed plan. In the Disclosure Statement, the debtor lays out a clear picture of its assets, liabilities, income, and expenditures. It also includes a summary of the company’s financial history and projections for its future performance.
The Disclosure Statement contains an analysis of the proposed reorganization plan, detailing how it will work and why the plan is in the best interests of creditors. The Disclosure Statement must also analyze creditor distributions that the debtor filed under Chapter 7 liquidation versus the proposed Chapter 11 plan, demonstrating why the Chapter 11 plan is more advantageous.
The Bankruptcy Court holds a hearing on the Disclosure Statement to ensure it meets the requirements of the Bankruptcy Code. The purpose of the hearing is to confirm that the Disclosure Statement contains sufficient and accurate information about the debtor’s financial condition and proposed reorganization plan. After the court approves the Disclosure Statement, the debtor can distribute it to creditors for review.
Step 11: Voting on the Plan
Following the court’s approval of the Disclosure Statement, the next stage of the Chapter 11 process begins: voting on the reorganization plan. The approved Disclosure Statement and the reorganization plan are sent to all creditors and equity security holders. Creditors are divided into classes based on the nature of their claims, and each class votes on the plan separately.
Step 12: Plan Confirmation
The culmination of the Chapter 11 bankruptcy process is the plan confirmation. After the votes have been counted and the debtor has made any necessary amendments to the plan, the bankruptcy Court holds a confirmation hearing. At this hearing, the Court assesses whether the reorganization plan meets all the requirements of the Bankruptcy Code. This includes:
- That the plan is feasible,
- Is proposed in good faith, and
- Is in the best interest of creditors.
If the Court confirms the plan, it becomes legally binding on the debtor and its creditors, regardless of whether creditors voted in favor of the plan. Once confirmed, the debtor must adhere to the restructured payment arrangements and operational changes as outlined in the plan.
As long as the business adheres to the terms of the plan, it can continue to run without interruption. Upon confirmation, the business can also get a discharge and request that the bankruptcy case be closed administratively, potentially saving the business additional expenses.
How Chapter 7 Bankruptcy Works, Step-By-Step
Step 1: Consult a Business Bankruptcy Attorney
Filing for Chapter 7 bankruptcy and liquidating your business is a serious decision, which requires careful consideration. Consulting with a business bankruptcy attorney, such as Steiner Law Group, will allow you to make an informed decision about whether liquidating your business is the best option. An attorney will assess your situation, discuss Chapter 7 specifics, and advise you on the Chapter 7 process. With a lawyer’s guidance, you can make informed decisions and, if you decide to proceed, retain them as your legal counsel.
Step 2: Obtain and Provide the Necessary Documentation to Your Attorney
You will provide a litany of relevant documents to your attorney, who will review all documentation. Based on this review, your attorney will provide counsel on the implications of a Chapter 7 filing for your business and prepare the bankruptcy paperwork detailing your business’s financial situation. This includes assets, liabilities, and in-depth queries about your financial affairs. After a thorough review and revisions, the finalized bankruptcy petition and schedules will be filed with the Bankruptcy Court, thus invoking the “automatic stay.” The timing of when to file is a critical factor, as it can significantly influence the extent of your financial relief. Filing at the right time can protect more assets, manage immediate crises, and halt collection activities.
Step 3: Drafting of the Bankruptcy Petition and Schedules and Filing
Based on the documentation and the attorney’s experience, your attorney will draft the various petition and schedules, including a list of property, various creditors, and a statement of financial affairs. After reviewing and signing with the debtor to ensure that the paperwork is accurate, the case is then filed with the Court.
Step 4: Appointment of a Chapter 7 Trustee
Once the bankruptcy petition is filed, a Chapter 7 Trustee is appointed. The trustee will review the bankruptcy paperwork and undertake various administrative duties, and if the business has assets of value, the trustee will determine which assets to liquidate.
The trustee’s role is not to run the business or make strategic decisions. Rather, their main aim is to convert the debtor’s non-exempt assets into cash efficiently and maximize the return to the creditors. In essence, the appointment of a Chapter 7 Trustee ensures the bankruptcy process is conducted with the utmost integrity and fairness.
Step 5: 341 Meeting of Creditors
Within 30 to 40 days after the bankruptcy case is filed, the Chapter 7 Trustee holds a 341 Meeting of Creditors. During the 341 Meeting, the trustee asks the debtor detailed questions about its assets, liabilities, and any significant financial transactions documented in the bankruptcy paperwork. The objective is to obtain a clear, accurate picture of the debtor’s financial situation and ensure that all information provided in the petition is complete.
Creditors are also afforded the opportunity to attend the meeting and ask questions about the debtor’s financial affairs and bankruptcy paperwork. If the trustee determines that they wish to pursue assets, they will set a deadline by which creditors must file claims to be paid from the liquidation of these assets. These claims outline the amount owed and the priority and nature of the debts. Upon submission of these claims, both the debtor and trustee are granted the right to object if they believe a claim is erroneous or fraudulent.
Step 6: Asset Liquidation
Next, the trustee proceeds with the liquidation of the debtor’s non-exempt assets. This step involves converting these assets into cash, which will be used to pay off the business’s debts. Once assets are liquidated, and with the court’s approval, the proceeds are distributed to the creditors in accordance with the priorities set in the Bankruptcy Code.
It’s important to note that both debtors and creditors have an opportunity to raise objections during this step. For instance, the debtor, might dispute the trustee’s choice of assets for liquidation or the proposed allocation of funds. This mechanism ensures that all parties’ interests are considered in the liquidation and distribution process.
The asset liquidation stage is vital for your journey towards a financial fresh start. It also provides creditors with a measure of repayment, although it’s important to understand that not all creditors may receive full compensation for their claims due to the finite value of the business assets.
Step 7: Completion and Reporting
Upon completing the process of asset liquidation and distribution to creditors, the Chapter 7 Trustee then moves on to the final step: completion and reporting.
The trustee compiles a report that provides a detailed account of their actions throughout the bankruptcy process. This document includes information about the assets that were liquidated, the funds generated from the sales, and how these proceeds were distributed among creditors. It also encompasses any objections raised and how they were resolved. Once finalized, this report is submitted to both the bankruptcy court and the Office of the United States Trustee.
After the report is filed, if there are no unresolved issues, the bankruptcy case is typically closed soon after. Although a business does not receive a bankruptcy discharge, the completion and reporting stage marks the end of the Chapter 7 bankruptcy process, providing you with a path forward and a fresh financial start.
How Chapter 13 Bankruptcy for Sole Proprietorships Works, Step-By-Step
Step 1: Consultation with a Bankruptcy Attorney
The first step of filing Chapter 13 bankruptcy for sole proprietorships is to consult an experienced business bankruptcy attorney. An attorney can provide invaluable guidance and expertise, helping you-the sole proprietor-to understand your options, assess your financial situation, and navigate the complexities of bankruptcy laws. With a lawyer’s guidance, you can make informed decisions and, if you decide to proceed, retain them as your legal counsel.
Step 2: Document Compilation, Review, and Advice
Your attorney will walk you through the process of compiling all pertinent financial documents to get a thorough understanding of your financial landscape. Your attorney will request documentation related to:
- Income and cash-flow statements
- Asset documentation
- Debt documentation
- Tax returns
- Legal documentation (such as contracts, leases, and loan agreements)
- Profit & Loss statements
- Various additional documents as may be necessary
Your lawyer will guide you through the each of the documents based on your specific circumstances.
Step 3: Drafting of the Bankruptcy Petition and Schedules
Based on the documentation and the attorney’s experience, your attorney will draft the various petitions and schedules, including a list of property, various creditors, and a statement of financial affairs. After reviewing and signing with the debtor to ensure that the paperwork is accurate, the case is then filed with the Court.
Step 4: Filing the Petition and Submitting a Chapter 13 plan
Next, you’ll file a petition with the Court that includes detailed information about your assets, liabilities, income, and expenses. Upon the filing of this petition, an “automatic stay” goes into effect, providing respite from creditors and halting further collection attempts.
Perhaps the most critical step for sole proprietorships is the submission of a repayment plan. This plan outlines how you intend to repay either all or a part of your debts over a span of three to five years. Given the blurred lines between business and personal debts in sole proprietorships, the importance of understanding this step is vital. Typically, the repayment plan is filed concurrently with the bankruptcy petition and accompanying payment schedules.
Step 5: Appointment of a Chapter 13 Trustee
Upon filing, a Chapter 13 Trustee will be appointed to your case. Once appointed, they assume a crucial administrative role, effectively acting as the mediator between you and your creditors. The trustee’s primary duties involve conducting the 341 meeting, ensuring the plan meets the requirements of the Bankruptcy Code, collecting scheduled payments from the debtor, and subsequently disbursing these funds appropriately among the creditors.
Step 6: 341 Meeting of Creditors and Confirmation Hearing
The 341 Meeting of Creditors provides a forum for the bankruptcy trustee and creditors to ask the debtor questions about its financial condition and details of the proposed repayment plan. It’s an opportunity for the trustee to verify the accuracy of the information provided in the debtor’s bankruptcy documents and for creditors to voice any concerns or objections they might have.
When the case is filed, your confirmation hearing is also scheduled. At this juncture, a judge reviews your repayment plan. If it meets all the requirements of the Bankruptcy Code and is fair to your creditors, the Court will approve, or ‘confirm’, the plan, setting the stage for you to progress towards your goal of financial rehabilitation.
Step 7: Commencing Payments
As mandated by bankruptcy law, you are required to make your first payment to the Chapter 13 Trustee within the initial 30 days following the filing of your case and every 30 days thereafter. These payments are determined by numerous factors, including your budget and the value of any unexempt assets. It’s critical to stay diligent and punctual in making these payments, as failure to do so could risk the dismissal of your case.
Step 8: Discharge of Debts
The culmination of your diligent adherence to your Chapter 13 repayment plan is the discharge of debts. Upon successful completion of all payments under your repayment plan and other administrative requirements, the Bankruptcy Court orders a discharge of the debtor’s liabilities. However, it’s more than just an end; it’s a fresh start. The discharge of debts paves the way for financial recovery, enabling you to rebuild and move forward from a more secure and stable financial footing.
The Role of an Attorney in Navigating Business Bankruptcy
Filing for Chapter 11, Chapter 7, or Chapter 13 business bankruptcy requires extensive experience and diligence. Here’s how a business bankruptcy lawyer can help:
- Financial Analysis: An experienced bankruptcy attorney will meticulously analyze your business’s financial standing, offering a clear and accurate picture of your current financial situation, and identifying potential areas of concern.
- Navigating the Bankruptcy Process: Your attorney will guide you through the intricacies of the business bankruptcy process, ensure that you understand the implications of filing bankruptcy, and advise you on compliance with the requirements of the Bankruptcy Code.
- Debt Restructuring in Chapter 11: After a mutual agreement between the business owner and attorney, the existing business debt may be able to be strategically restructured. This approach enables the continuous operation of your business while simultaneously enhancing its potential for profitability.
- Legal Guidance: Bankruptcy law is a labyrinth of complexities and your attorney will advise you throughout the process.
- Objective Perspective: An attorney can provide a clear, unbiased viewpoint and advise you on decision-making with the goal of putting you in a position to make more informed decisions about your business’s financially stable future.
Steiner Law Group Understands the Question “How Does Business Bankruptcy Work in Maryland?”
At Steiner Law Group, we are experienced in answering the question, “How does business bankruptcy work in Maryland?” We understand that filing for business bankruptcy is a complex process, requiring a copious amount of paperwork and filings, a multitude of meetings and hearings, and complex reorganization or dissolution strategies.
Your Business Can Have a Bright Future With the Assistance of Steiner Law Group
Steiner Law Group has helped hundreds of Maryland residents to discharge millions of dollars of debt. We advise our clients throughout the Chapter 11, 7, and 13 processes and guide a business through each step of its journey.