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When is a Chapter 11 filing appropriate for a business?

In this day and age, many businesses face the very real threat of running into serious debt problems because of the economy. Although the economy is on the rise again, according to those in the know, some companies still may not show a profit immediately. Depending on the financial situation of the business in question, bankruptcy may not be necessary. However, some business owners may find that filing for bankruptcy is the best option. Bankruptcy allows for certain financial freedoms amid overwhelming debt.

Recently, it was reported that retailer Wet Seal has filed for bankruptcy protection. Analysts say that the clothing chain, which has many stores in shopping malls, is one of many retailers that has struggled in recent years as foot traffic in malls has dropped significantly.

There are a couple of bankruptcy filings that are appropriate for businesses. A struggling business can either file a Chapter 7 bankruptcy or a Chapter 11 bankruptcy. Each of these filings accomplishes different things. A Chapter 7 filing closes the doors of the business completely as it provides that all of the business assets be liquidated to satisfy the business debt. Once this happens, the likelihood that the business will survive is small. A Chapter 11 filing allows the debtor to stay in control of their company while paying off its creditors. This gives a greater opportunity for the company to stay afloat especially if there are any financial reserves left after the debts are paid.

Since bankruptcy is a court guided process, the courts ensure that all proper processes and procedures are followed. Bankruptcy filings can be difficult to pin down in that business situations often change on a daily basis and these daily changes may or may not impact the bankruptcy proceedings. Experienced bankruptcy lawyers know just how to handle this kind of situation.

While the economy has been improving recently, bankruptcy filings are still a popular solution for struggling businesses.

Source: The Street, "Wet Seal Bankruptcy Filing Leaves Experts Wondering Who's Next," Janet Morrissey, January 20, 2015

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