When Chapter 11 Just Isn’t Working Out As Planned

Coming to terms with the fact that a business is failing is extremely difficult for many business owners. A business almost becomes an extension of oneself after so much heart and soul have been poured into it. And business owners tend to be overly optimistic, otherwise they never would have started a business in the first place.

Many business owners facing bankruptcy want to file under Chapter 11, which allows them to retool, and move forward rather than wind down their affairs. But Chapter 11 is not the best option for all businesses. Many times a business simply cannot be salvaged, no matter how much the business owner wishes it could be. In such a situation, it may be necessary to convert a Chapter 11 bankruptcy into a Chapter 7 bankruptcy.

A Recent Example Of A Chapter 11 to Chapter 7 Conversion

There have been several sporting goods retailers with stores in the Milwaukee area file for bankruptcy over the past couple years. MC Sports, which is based in Michigan but had 7 stores in Wisconsin, filed for Chapter 11 bankruptcy in February 2017. It began liquidating its inventory to pay back creditors while looking for a buyer that could bring the business back from the brink. In late May, the company asked the court to convert its bankruptcy from Chapter 11 to Chapter 7 after it was unable to find a buyer and had decided to close its doors permanently.  

Conversion is Common

This is not an unusual situation. Many businesses that file under Chapter 11 and continue to struggle, even after taking advantage of the benefits that the bankruptcy law provides, end up converting to Chapter 7 and winding the business down completely. Reorganization is simply not possible for every business out there.

Debtors who filed under Chapter 11 typically have a one-time absolute right to convert the case from a Chapter 11 case to a Chapter 7 case.

Sometimes Business Owners Have No Choice But To Convert

Sometimes debtors have no choice but to have their case converted to a Chapter 7 bankruptcy. A party in interest, which includes creditors, can file a motion asking the court to convert a Chapter 11 case “for cause.”

There are many ways a party in interest can show cause. They can show the business is being mismanaged, present evidence that the business is continuing to lose money and is unlikely to recover, or alert the courts that the public is being put at risk by the continued operation of the business in question. These are just a few of the most common ways a party in interest can show cause. The Bankruptcy Code sets forth numerous examples of cause that would support conversion.

Don’t Guess Or Go It Alone, Contact An Experienced Bankruptcy Attorney

Business owners who are struggling to make Chapter 11 work, and creditors or other parties in interest who are frustrated with a case they are involved with, should not hesitate to speak with an attorney about converting a Chapter 11 case into a Chapter 7 case. There are few downsides to converting, but an experienced bankruptcy attorney can explain the pros and cons of converting a specific case.