Sometimes, a business or a wealthy individual will amass too many debts to creditors and will not have the cash flow to pay off those debts, and may not be able or willing to sell off enough assets or lay off enough workers to make up for the deficit. In this case, declaring bankruptcy is the standard method, and a bankruptcy court can offer mediation between a debtor and its creditor(s), and bankruptcy law exists to make sure that a fair, productive settlement is reached. Arbitration may be needed alongside mediation, but if all goes well, the debtor will have a solution in place and the creditors will received at least a portion of what they are owed from their ailing debtors. How can bankruptcy filings find a solution, and what steps are involved? And what roles will computer intrusions play in causing bankruptcy?
It is a simple fact of the business world that sometimes, a company, big or small, gets into financial trouble. Lagging sales, being outmaneuvered by competitors, having too much overhead, or even theft can all cause a company to have much more debt than it can handle, and often, a chapter 11 bankruptcy case is the only escape. In today’s digital world, computers are a huge asset, allowing for Cloud data storage, private servers, and workers operating remotely as well as virtual presences in meetings. But the dark side of the Internet involves theft; corporate rivals, disgruntled employees, or other cyber criminals may break into a company’s security and steal money, credit card information, or trade secrets, and this can cripple a company and cost it thousands or millions of dollars, depending on what was stolen, and a company may be attacked by more than one cyber criminal. In the case of such a crime, a company may find itself in bankruptcy, even if business is good. Now what?
Chapter 11 Bankruptcy Filings
Chapter 11 bankruptcy is an option often exercised by defaulting debtors. In fact, they are often on the smaller side. Data shows that some 90% of chapter 11 debtors have $10 million or under in assets or liabilities, and under $10 million in annual revenue and a workforce of 50 or fewer employees. Sometimes, wealthier individuals will also file bankruptcy this way, but most often, smaller businesses will use this option.
According to Nolo, a chapter 11 bankruptcy case is a mediation between the debtor and creditors that works to find a solution for all involved, and without mediation, the debtors may try to avoid their creditors or the creditors may exploit the debtors, so mediation makes for fair and sensible proceedings. To start with, in most cases, the debtor will voluntarily file for chapter 11 bankruptcy (it is rare for a creditor to force the issue). Businesses will file this case in the state in which they are incorporated, rather than their home state; a business that started in Colorado but incorporated into California will file its chapter 11 bankruptcy case in the latter state and use its laws and courts. A chapter 11 bankruptcy case may last from six months to two years or so, but may take a little longer or less time than that.
During mediation of the case, a trustee is not appointed to the debtors’ assets; that is, the debtor is considered “debtor in possession”, or DIP, and it may continue operations as normal, with some restrictions. But if the debtor is being fraudulent, uncooperative, or dishonest, mediation calls for a trustee after all. In the case of DIP, the business operates as normal except that it needs the court’s permission for actions such as shutting down or expanding its business operations, buying or selling assets outside of its normal business transactions, and entering or breaking leases with property.
For four months after the case starts, the debtor is given a time period where it may reorganize itself and attempt to find a way to pay off its creditors, known as a reorganization plan, and this time period may be extended. Once this period expires, the creditors and court mediate on the case and may offer competing plans, but typically, the debtor’s plan will be accepted, and once the court confirms the plan, it can go into action.