Business Bankruptcy: When to Choose Chapter 11?

Chapter 11 bankruptcy protection lets business owners reorganize their debts and pay them off more easily. If you want to try to save your business, you can use Chapter 11 bankruptcy to do so. If you'd rather shut your doors forever, you can file for Chapter 7 instead - but there are some limitations with this option.

Choosing Chapter 7 Means Going Out of Business

When your business files for Chapter 7 bankruptcy, the bankruptcy trustee takes control of its assets and sells them. The trustee uses the money to pay your business's creditors, and you have nothing left with which to operate. If your business isn't savable, and if you just want to shut down operations with a minimum of fuss, you might want to choose this option. Otherwise, Chapter 11 allows you to keep your assets and try to get your business back on its feet again.

Some Businesses Can't Eliminate Debts in Chapter 7

Any business can file for Chapter 7 bankruptcy, but doing so doesn't necessarily mean the business' debts will go away. The law doesn't allow corporations and partnerships to eliminate their debts in Chapter 7. Only unincorporated businesses may do so.

If your business is a corporation or partnership, and if the sale of its assets doesn't pay off all its debts, your company will still be responsible for those debts if it begins operating again. Chapter 11 eliminates debts your business contracted for before it filed for bankruptcy, even if your reorganization plan doesn't pay them off completely.

Chapter 11 Allows Your Business to Keep Operating

In Chapter 11, companies enter into a repayment plan and pay off their debts at a more manageable pace. Chapter 11 prevents creditors from calling in loans all at once, which could cripple an operation. If your business is a corporation, your stockholders must agree to your repayment plan.

The bankruptcy court has to approve it as well. Creditors and stockholders can object to your plan, but the court will still approve it if it's reasonable. If you think your business would benefit from a period of time in which to pay off creditors, while still earning income, you might want to choose Chapter 11.

The Court Will Be Involved in Your Business Decisions

If your business files for Chapter 11 bankruptcy protection, the bankruptcy court has the power to approve some of your business decisions. You're still in control of daily transactions, but anything involving a great deal of money needs the consent of your bankruptcy trustee and the court. If you don't want to relinquish this kind of control, Chapter 11 might not be your best choice.

A Business Bankruptcy Lawyer Can Help

The law surrounding Chapter 11 business bankruptcy is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.

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This article was verified by:
David G. Hicks | June 03, 2015
11717 Burt Street Suite 106
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