While Chapter 7 and Chapter 13 are the most common types of bankruptcy, the lesser known Chapter 11 is often the best choice for small businesses in need of debt relief. You usually hear about Chapter 11 when major corporations file for bankruptcy, but tens of thousands of smaller businesses file for Chapter 11 every year.
Who Can File for Chapter 11 Bankruptcy?
The most common candidates for Chapter 11 include corporations, partnerships, and limited liability companies. Chapter 11 offers debt relief for a wide range of entities, from multinational behemoths to mom-and-pop shops. In addition, individuals with large amounts of debt may also file for Chapter 11 bankruptcy, but personal debt relief is usually easier to obtain in Chapter 7 or Chapter 13.
How Chapter 11 Works:
After filing for Chapter 11 bankruptcy, petitioners typically have four months to propose a reorganization plan to the court. This plan sets forth the debtor’s strategy for repaying creditors over an extended period of time. Usually, companies in Chapter 11 protection will reduce their operating expenses and sell some assets in order to free up funds to repay creditors. The reorganization plan allows filers more time to pay their debts, potentially eliminates these obligations, and gives creditors assurance that they will receive some payment.
The Benefits of Chapter 11:
The primary benefit of Chapter 11, of course, is the potential debt relief afforded by the reorganization plan. But another crucial advantage of Chapter 11 is that it allows businesses to continue operating during the bankruptcy process. If companies had to close during Chapter 11, which can take several months, there would no longer be a business to save. So courts allow Chapter 11 filers to keep their doors open while they resolve their debt troubles.
Potential Obstacles in Chapter 11:
While Chapter 11 has helped save countless businesses, there are potential pitfalls for filers. For example, the bankruptcy court has the right to deny the reorganization plan, which sends the filer back to the drawing board. But petitioners have an exclusive right to file a reorganization plan for four months, and this right can be extended for up to a year and a half if the court believes the filer needs more time. After the exclusive period ends, creditors can propose their own reorganization plans, but these, too, need to be approved by the court.
As you can see, filing for Chapter 11 bankruptcy may provide much needed debt relief, but it’s a fairly complex process. For more information on the benefits of Chapter 11, call a bankruptcy lawyer today.