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What is a Chapter 11 bankruptcy?

Since the recession, a number of businesses have ended up struggling under mounting debts. In fact, we're even posted on a number of different businesses -- both large and small -- that have filed for Chapter 11 bankruptcy in the hopes of reorganizing debts and staying in business.

According to a recent article in the Orlando Business Journal, in 2011 there were 544 Chapter 11 bankruptcies filed. And while this is still a significant number, it was in fact a 24 percent decrease from the 720 Chapter 11 bankruptcies that were filed in 2010.

However, of hearing this news, many might be wondering what exactly a Chapter 11 bankruptcy is, and what a business hopes to accomplish with this type of filing.

In the simplest terms, a Chapter 11 bankruptcy is filed when a business owes money to creditors. These creditors can be secured, meaning they have some sort of claim in assets tied to that company, or unsecured, which means there are no security claims. Typically, secured creditors are paid back what is owed first.

In terms of the bankruptcy process, a business comes up with a reorganization plan. This plan details how the business will be operated in the future in order to stay profitable. Specific financial goals are laid out with a plan on how these goals will be reached.

Once this plan is created, it is presented to the court. If the plan is accepted, the plan then goes into action. However, if the plan is not approved by the court, typically the business is asked to generate a new plan. In other cases, a Chapter 11 may turn into a Chapter 7, which would be liquidation.

The main goal under a Chapter 11 is for the plan to be approved and for the business to emerge from bankruptcy and remain in operation.

Of course, this is a very brief description of a Chapter 11 bankruptcy, and the filing process and creating the actual plan to present to the courts can become quite complicated. This is why it's advisable to talk with an attorney who focuses on Chapter 11 in order to help with the process.

Source: Orlando Business Journal, "The ins-and-outs of Chapter 11," Richard Bilbao, June 6, 2012

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