Solid North Texas economy makes Chapter 11 answer for some businesses

Chapter 11 reorganization bankruptcy may be right for your North Texas business.

The Dallas Business Journal in May 2014 shared good news for entrepreneurs and businesses across northern Texas: a major bank is calling the North Texas economy "robust." The article summarizes key points of Dallas-based Comerica Bank's report:

  • Job numbers, incomes and housing starts are up.
  • New businesses are opening.
  • The unemployment rate at 5.4 percent is below the national average.
  • The energy industry, State Farm and Toyota are making positive contributions.
  • "Credit quality" is better.
  • Bankruptcy numbers are falling.

While this news is certainly welcome, Texas businesses may still be feeling the economic downturn. For those continuing to struggle with debt that is keeping expansion and profit at bay, Chapter 11 (of the U.S. Bankruptcy Code) should be considered.

Broadly, a U.S. business bankruptcy takes one of two paths: reorganization or liquidation. In a reorganization, the commercial entity decides to continue doing business after executing a court- and creditor-approved plan of debt prioritization, affirmation, pay-down and extinguishment.

By contrast, a liquidation bankruptcy under Chapter 7 (or 11 in some cases) winds down and closes the business by selling off assets to pay debts in a preferential order and discharging remaining debts. This may be the better, cheaper alternative for a business that has taken a harder hit from the recession.

With the business climate in North Texas on the upswing, the owner of an ailing business should strongly consider whether a Chapter 11 bankruptcy reorganization makes sense as a long-term solution. If there are still significant assets and continuing revenues, reorganization may be the key to getting debt under enough control to start improving the balance sheet. With the better regional economy, reorganization may allow the business to regain its health and profitability.

While the United States Courts website provides a detailed summary of Chapter 11, here are the basics:

  • When a Chapter 11 bankruptcy petition is filed with the U.S. Bankruptcy Court, an automatic stay is issued that stops all debt collection activity, including litigation, against the debtor.
  • A U.S. trustee will be appointed to assist the court administratively.
  • The debtor files a disclosure statement of its assets and debts for court approval.
  • The debtor has the first right to file a plan for court and creditor confirmation; later certain interested parties can propose plans.
  • The debtor business (called the debtor-in-possession) will continue to operate under the conditions of the approved plan in most circumstances, or a Chapter 11 trustee may be appointed to oversee operations.
  • Certain debts may still be discharged in Chapter 11, meaning they will no longer be enforceable; how debts are treated depends on whether they are secured by property or unsecured (with or without priority), administrative or in a nondischargeable category like certain taxes or criminal restitution.
  • Like creditors are formed into creditor committees to monitor the bankruptcy and assert rights when appropriate.
  • Small business cases are uniquely administered.

The key to deciding if bankruptcy is the right step for your North Texas business, whether a reorganization that continues the commercial concern into the future, or a liquidation to wind down the business, is to engage an experienced Texas bankruptcy attorney who can help you analyze your goals, the state of affairs of your business and the pros and cons of each path.

Chapter 11 should not be filed without serious consideration, as it is a long process, expensive and complex. That being said, it could be the answer for your business with skilled and knowledgeable legal counsel to guide you through it.

Keywords: North Texas, economy, Chapter 11, business bankruptcy, reorganization, debt, creditor