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What Happens During a Chapter 11 Bankruptcy?



They didn't think that I could save my business from Chapter 11 Bankrutpcy, but I did ... here's how.

 

 

With Chapter 11 bankruptcy, the owner reorganizes the business so it can gain relief from creditors. Then the owner, with the help of the court and its creditors, comes up with a strategy to pay its debts. Sometimes the judge even reduces the debt. In Chapter 11 bankruptcy, the business continues to run. The intent is to help the company make a new start.

Business Operations under Chapter 11

Although the business continues to function, the business owner loses some control. The court now oversees the business restructuring and all future business decisions. And the owner, with the stockholders, must negotiate a plan to repay the creditors. Most of these creditors are secured.

When the assets of a business are less than $200,000, the court considers the company to be a small business. In this case, the judge can remove the creditors from the committee that plans the repayment of the debts. Smaller businesses can move through Chapter 11 bankruptcy more quickly but they often have a tougher time surviving the process.

The Bankruptcy Process

Once the owner files Chapter 11 bankruptcy, there is an automatic stay. This means the creditors can no longer badger the business for accounts payable. They now must go through the court. It is the responsibility of the business to continue running so it can eventually turn a profit.

Once the court sets the automatic stay, the creditors form a committee. The court assigns a trustee to the business and he or she appoints members to the creditors' committee. The members of this committee are usually those creditors who have the largest secured debts. The committee can investigate for fraud and participate in the plans to pay back debt. It can also hire attorneys and oversee some of the owner's business operations.

The owner has 120 days to come up with a plan to repay debts and to present that plan to the bankruptcy court. The creditors must approve the plan during the first 180 days. If the owner does not put in a plan or if the creditors cannot approve it then the creditors suggest an alternate plan. The court always has the final say.

The plan explains who the business will pay back first. Secured creditors always get the first cut. After that, the bondholders get their money. Finally the business pays the employees and then the stockholders if there is anything left. Often the employees and stockholders get nothing.

In the end, a business files Chapter 11 bankruptcy in hopes of becoming profitable again. This does not always work. With many small business, the owner ends up filing under Chapter 7. This means a total liquidation of the business payoff the creditors. Thus, the business must shut its doors forever.

How to save your business from closure and bankruptcy

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