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Some basics on Chapter 11 bankruptcy for businesses

In our last post we discussed Chapter 7 and Chapter 13 bankruptcy, which are the two most common options Americans choose when filing for personal bankruptcy. Businesses can also file for Chapter 7 bankruptcy, and businesses classified as “sole proprietorships” can sometimes qualify for Chapter 13.

That being said, many businesses first attempt to pursue Chapter 11 bankruptcy, which focuses on restructuring and reorganizing debt in order to make the business profitable again. In today’s post, we’ll discuss some factors to consider when contemplating business bankruptcy protection.

As we mentioned above, Chapter 11 bankruptcy is about working toward profitability. Both large and small businesses can pursue Chapter 11, but not all small businesses will complete the process. A court may decide that the business has no chance or only a slim chance of becoming profitable again. In those cases, the Chapter 11 filing may be thrown out and converted to a Chapter 7 filing.

Assuming that the case can proceed as a Chapter 11 filing, the court will impose an automatic stay on creditors, which means that all collection actions must temporarily stop. The next step would be for the business owner(s) to propose a debt reorganization plan. This is a plan for how to repay creditors. It may include negotiations to reduce the amount of debts owed.

While creditors can accept or reject the proposed terms, it is often in their best interests to negotiate. This is because the terms they would get under a Chapter 11 filing are typically better than they would receive if the debtor had to file for Chapter 7.

Chapter 11 is a tricky process that requires the help of an attorney. Moreover, you should consult an attorney to help you decide which type of bankruptcy filing best fits your particular personal and/or business needs.

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