Filing a Chapter 11 Bankruptcy in California

A Chapter 11 bankruptcy in California is considered to be a rehabilitative reorganization procedure used by businesses including sole proprietors, partnerships, and corporations. The term “rehabilitative” refers to the design of the bankruptcy filing, which is meant to restore the business owner’s capacity to pay off certain debts while having others discharged. Due to the complex nature of a Chapter 11 bankruptcy filing, the process should never be attempted without the counsel of a qualified bankruptcy attorney to navigate the course of the bankruptcy laws and ultimately get the best outcome possible in relation to the specific circumstances of the company that is filing.

The business owner who files for a Chapter 11 bankruptcy includes a petition listing assets, liabilities, and detailed financial statements. As part of the rehabilitative process, filers will usually act as their own trustee, known as a “debtor in possession”, and stay in possession of the property credited to the business after the bankruptcy is completed. Under certain circumstances, the bankruptcy court can appoint an outside trustee for reasons of mismanagement, fraud, and/or misrepresentation of the company’s financial standing. Additionally, in complex cases where the court determines that closer scrutiny is required, a bankruptcy court appointed trustee can be assigned to take over operations of the corporation and/or debtor’s assets. In a somewhat less invasive step, the court can also appoint an independent “examiner” whose job it is to oversee the corporation’s day to day activities during the Chapter 11 bankruptcy workout process.

As the bankruptcy process begins, a trustee for the court is assigned to analyze the list of assets and liabilities to determine which debts will be paid in full and which ones will be paid off in part or discharged. Debts which are typically paid in full, according to California bankruptcy law, include alimony, child support, taxes, fines and government loans. The trustee then balances assets and liabilities and creates a repayment plan for submission to the bankruptcy court. An approval of the plan by the court results in an order listing which debts will be discharged and which debts will be honored. During the period between the submission of the trustee’s petition and the final court approval of the Chapter 11 bankruptcy filing, all creditors must stop any attempts to collect the debt owed to them. Creditors are, however, able to dispute aspects of the plan which can result in the necessity of working out new terms between the debtor, the bankruptcy court trustee, and the creditor.

As the typical structure of a Chapter 11 bankruptcy is designed to pay creditors back via the sale of certain assets and the ongoing operations of the subject company, the success rate of Chapter 11 filings is considerably low, with estimates as low as 10% for completion of the process. Part of the reason for this low success rate is that an already struggling corporation burdened with paying off previous creditors is likely to continue to struggle and could go bankrupt again. In many cases, the motivation to continue operations diminishes to the point where the company’s ownership seeks greener pastures, leaving the company in the hands of the trustee for the court. This issue combined with the complexity of filing this type of bankruptcy necessitates that an experienced bankruptcy attorney be consulted to determine whether a Chapter 11 filing will yield the best result. The Law Offices of Zhou and Chini specialize in helping struggling California companies find the answers to these and other financial issues.