Every Illinois business has to deal with its share of hard times. But when the debts have mounted to the point where the business can no longer meet basic obligations like payroll or rent, it may be time to consider seeking bankruptcy protection. While Chapter 7 bankruptcy is useful for liquidating a business that plans to close outright, Chapter 11 provides an option to keep the doors open while negotiating with creditors and stabilizing the overall financial situation.

What You Need to Know About Bankruptcy Reorganization Plans

The key to a Chapter 11 bankruptcy is filing a reorganization plan with the federal bankruptcy court. Illinois is divided into three federal judicial districts, each with its own bankruptcy court, and the Chapter 11 filing should be made within the district where the business is located. The bankruptcy court is responsible for approving and overseeing the reorganization plan.

In some cases a business will have a prepackaged reorganization plan ready to go before setting foot inside the federal courthouse. But this requires the cooperation of the business' lenders and other creditors. This is often not financially or logistically practical.

In fact, most Chapter 11 cases are referred to as “free fall” bankruptcies, as the business is facing a sudden economic crisis (i.e. it cannot meet this week's payroll and needs to act quickly before having a reorganization plan in place). Once a bankruptcy petition is filed, the court imposes an “automatic stay” against the collection of any outstanding debts. This means creditors cannot sue or foreclose upon the assets of the business until the bankruptcy court grants relief from the stay. While the stay does not immediately discharge any debts, it does afford the business some breathing room to sit down with its creditors and negotiate a reorganization plan.

As the debtor, the business has the exclusive right under Chapter 11 to submit a reorganization plan during in the first 120 days following the initial filing. (The bankruptcy court may extend this exclusivity period up to 18 months.) And unlike a Chapter 7 case, where the company's assets are surrendered to a court-appointed trustee, the business typically retains possession of its assets during a Chapter 11 proceeding. This means that even in a free-fall bankruptcy scenario, the business still retains significant control over the process. Additionally, should the business ultimately decide to liquidate rather than remain in business after reorganization, a Chapter 11 plan may still prove more advantageous than converting the case to Chapter 7.

Always Work With an Experienced Illinois Bankruptcy Attorney

Keep in mind, preparing and securing approval of a Chapter 11 reorganization plan is not a simple undertaking. The creditors retain certain legal rights and may object to the debtor's plan. Indeed, if the business fails to win approval for its plan during its exclusivity window, the debtors—or even a court-appointed trustee—may file a competing reorganization plan. This is the inherent risk of a Chapter 11 filing, so if your Illinois business is considering this option, it is imperative you contact and work with a qualified Illinois bankruptcy lawyer.

For more information on this area of law, see our bankruptcy overview.