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What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a type of bankruptcy that allows businesses and individuals to restructure their debt without liquidating their assets. Generally, Chapter 11 bankruptcy is used by small businesses, partnerships, corporations or other such business entities to allow them to reorganize their operations and continue operating throughout the bankruptcy process. Chapter 11 may be filed by individuals with a large amount of debt; however, it is a very complicated and expensive process that is not conducive to the financial situation of many individuals. Individuals seeking bankruptcy without liquidation often file under Chapter 13 (see What is Chapter 13 Bankruptcy?). When facing financial difficulties, a qualified bankruptcy attorney should be able to advise you about the different options you have for dealing with debt.

In addition to being able to continue operating a business in most instances of a Chapter 11 bankruptcy procedure, a business may also be able to continue to borrow money for business operating procedures in the form of secured and unsecured debt. This is often under the supervision of the court and contingent on the acceptance of a reorganization plan. During this time, it is important that use of collateral does not harm a secured creditor’s position.

When you file Chapter 11 bankruptcy, creditors must immediately cease all actions to collect money owed to them from your business. This is known as an automatic stay. An automatic stay allows a business and its creditors to begin negotiations, allowing a business time to try to resolve its financial difficulties.

A reorganization plan detailing how creditors will be paid back must be submitted to the court within 120 days of filing for Chapter 11 bankruptcy. After submitting your reorganization plan, the court will approve the plan if it is fair and in the best interest of the creditors. Typically, all creditors must also agree to the plan before it is approved. During this process of approving a reorganization plan, creditors may submit their own reorganization plan. These alternative plans typically involve liquidation and may be approved by the court if it is in the best interest of the creditor. An experienced bankruptcy attorney should be able to help you develop a reorganization plan and submit it within the time frame necessary for approval. Once a reorganization plan is agreed upon, it becomes a legally binding document between the business and its creditors—defining the relationship between the two and how debts will be paid back.

The decision to file for bankruptcy is difficult. There are many alternatives to bankruptcy for a small business, and in some circumstances it may be in your best interest to close the business instead of filing for bankruptcy. There are many nuances in bankruptcy law that determine how filing for Chapter 11 bankruptcy will impact your business and your life. An experienced bankruptcy attorney should be able to help you understand the different options available to you and advise you about the best course of action for your circumstances.