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How business bankruptcy Chapter 11 works

Business bankruptcy Chapter 11 is considered the most complicated bankruptcy case, and it’s also typically the most pricey type of bankruptcy proceeding. So it’s important that you carefully analyze and explore all of your other options first if you are considering a Chapter 11 business bankruptcy.

During a Chapter 11 business bankruptcy proceeding, the bankruptcy court will help the business restructure their obligations and debts. The business usually stays open and operational in most cases with a Chapter 11 business bankruptcy, which makes it much different than a Chapter 7 corporate bankruptcy. LLCs, partnerships, and corporations typically file for a Chapter 11 business bankruptcy rather than other kinds of bankruptcy.

A company in the process of filing a Chapter 7 business bankruptcy is allowed to continue to operate. The debtor, also known as the debtor in possession, runs the company in most cases, but in cases of gross incompetence, dishonesty, or fraud, a bankruptcy trustee runs the business throughout the course of the bankruptcy case.

The company is not allowed to make many decisions without the permission of the bankruptcy court, including the sale of business assets, expanding or stopping business operations, and beginning or ending a rental agreement. The bankruptcy court also has control over decisions around entering contracts with unions and vendors and paying attorneys. The debtor is not allowed to arrange a business loan that will start after the end of the bankruptcy case.

With a Chapter 11 personal bankruptcy, the business filing bankruptcy has the first opportunity to create and propose a reorganization plan. This plan could include renegotiating your business debts, downsizing business operations to decrease your expenses, and liquidating all of your business assets in order to pay back your creditors. The bankruptcy court will most likely accept your plan, as long as it is considered fair and feasible, and the process can then move forward.

The Small Business Reorganization Act of 2019 went into effect on February 19, 2020 and added a new subchapter V to the Chapter 11 business bankruptcy to make bankruptcy simpler for small businesses. According to the United States Department of Justice, small businesses include any entities with less than about $2.7 million in debts, as long as they meet other criteria.

The reorganization act imposes shorter deadlines for the bankruptcy case, enables more flexibility in negotiating restructuring plans with collectors and creditors, and offers a private trustee to work with the debtor and creditors to develop a consensual reorganization plan.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law on March 27, 2020 by the president. The act increased the Chapter 11 subchapter V debt maximum or limit to $7.5 million. The act applies to any Chapter 11 bankruptcies filed after the act was enacted and any sunsets one year after the act was enacted.

Are there any benefits to filing a Chapter 11 bankruptcy?

One of the biggest benefits of filing a Chapter 11 business bankruptcy is that the business entity can remain in control of their operations while developing their reorganization plan and going through the process of reorganizing. This allows businesses to generate cash flow that can help with the process of repayment.

The bankruptcy court will also issue an order to help keep creditors from going after the business during the reorganization process. Most creditors tend to be very receptive to Chapter 11 bankruptcies, since these bankruptcies can help them recoup most if not all of their money during the process of reorganization and repayment.