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Law Offices of Nicholas Gebelt
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Whittier, CA 90604
(562) 777-9159

Let’s talk about the pros first. The pros are, number one, it stops everything dead in its tracks because when a debtor files under chapter 11 or indeed under any bankruptcy code chapter, the act of filing the petition triggers a stay and you don’t have to do anything else, it’s called the automatic stay. What is a stay? In law, stay says “Stop”, whatever stayed has to stop immediately. And what stayed or stopped is all action by creditors against the debtor, against the debtor’s assets and against the estate that is created when the debtor files that bankruptcy petition. In practical terms, it stops the creditors from calling the debtor, sending the debtor bills, letters, suing the debtor, garnishing wages if it’s an individual, seizing money out of bank accounts, foreclosing on property. In essence, what it does is it erects a legal brick wall around the debtor to prevent the creditor’s depredations. So that’s a very, very powerful tool. And as long as the stay is in place, there is this nice insolation from the creditors. So that’s one very, very big pro and if a creditor violates the stay after its received clear notice, the debtor can sue it in the bankruptcy court and if the debtor is successful, the creditor has to pay the debtor’s court costs and attorney’s fees, which is really quite significant.
Now, that’s explicit when it comes to individual debtors. It’s not explicit when it comes to business debtors but there is a portion of the bankruptcy code that gives the bankruptcy judge equitable authority to get costs and attorney’s fees out of a contumacious creditor. That’s number one as a pro. Number 2 as a pro, it buys time. In fact, the debtor doesn’t even have to file plan for a certain amount of time depending on the circumstances and the debtor is the only one that can file a plan of reorganization during what’s called the exclusivity period. So it means that the debtor doesn’t have to even file a chapter 11 plan for, let’s say, four months. That gives you four months’ worth of time to look into what’s going on and see if there are ways that you can restructure the debts especially if you had to rush into the bankruptcy, let’s say, to stop a foreclosure sale. So it gives time.
Number three, you can of course appeal to creditor’s self-interests. And if I can take a little bit of a sidebar here for just a moment, the key to successful negotiations is always that you have to convince the person on the other side of the table that it’s in that person’s interest to do what you’re proposing. Appeals to compassion, “Oh, can’t you help me out”, those will always fail. But what you can do is get some sense of what the creditors are willing to live with and offer them that. And of course you can always point to the fact that if they don’t go along with what you’re proposing, you’ll go into chapter 7 and they’ll get less because one of the requirements of a chapter 11 plan is it has to, at the very least, payback the creditors at least as much as they would have gotten if you’ve done a chapter 7 liquidation. So, part of the plan is going to offer the creditors at the very least the chapter 7 liquidation value and generally we want to at least put in some kind of a sweetener there.
So we’re appealing, again, to the creditor’s self-interest. So it buys time. Number three, it makes it clear to the world that you are really on track to succeed. And when creditors see this and they see that you’re really serious about the reorganization, it may convince them to get onboard and so that can help with the voting process. So those are some real pros.
Now, some cons. Well, I suppose one con is if you don’t have the revenues to be able to support a chapter 11 plan, you’re just going to be spinning your wheels for a while. Yes, you’ll have time but in the end, you will spend all that money to do the chapter 11 without any hope of success. So there, it’s a question of the facts, is this really a business, is this individual really good candidate for a successful chapter 11? Second, once you file for a chapter 11, you fall under the court’s supervision. And this may sound a bit paternalistic but anything you want to do that’s of a significant financial nature, you’re going to have to get the bankruptcy judge’s permission.

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