Chapter 11 bankruptcy can help business owners stay afloat

In the aftermath of the recession, many small business owners have found themselves in difficult positions – unable to pay their bills and uncertain about the future. When faced with such a trying situation, it is important to understand the options available to regain solid financial footing. For many business owners, filing for Chapter 11 bankruptcy provides a way to start fresh.

Chapter 11 bankruptcy is considered a type of reorganization bankruptcy – similar to Chapter 13 bankruptcy, which is often used by individuals. In some circumstances, Chapter 11 bankruptcy may also be the appropriate choice for individuals, particularly when the person has property of significant value. For Chapter 11 to be appropriate for a business, it is important that the business is viable.

Under a Chapter 11 bankruptcy, the debtor files a plan of reorganization. Unlike other types of bankruptcy, Chapter 11 allows the debtor to remain in control of his or her business during the bankruptcy proceedings. The individual, referred to as the “debtor in possession,” is allowed to operate the business, so long as he or she is transparent regarding the financials of the business throughout the process.

As with other types of bankruptcy proceedings, an automatic stay goes into effect after a business files for Chapter 11. The automatic stay prevents creditors from attempting to collect on debts or repossess property following the bankruptcy filing – this includes preventing creditors from continuing with foreclosure proceedings.

Absolute priority rule

It is important to note that the absolute priority rule applies to Chapter 11 bankruptcy proceedings. Under the absolute priority rule, certain types of creditors are repaid before others. The first class to receive payment under the rule is secured creditors, followed by unsecured creditors. After both types of creditors are paid, preferred shareholders receive payments, followed by common shareholders. 

When a class of creditors objects to a Chapter 11 reorganization plan, the law requires that the plan be considered “fair and equitable” to that class. In other words, the class must receive reimbursement or property equal to the amount they are owed. If that is not possible, the absolute priority rule holds that a shareholder or creditor with less priority will not receive payment prior to the class at issue.

Protect your investment in your small business

When a business is suffering financially, the prospect of regaining its financial footing can seem daunting. Rather than conceding defeat, filing for Chapter 11 bankruptcy protection can allow business owners to take control of the future of their business. If you are in a similar situation, consulting with a skilled California bankruptcy attorney will ensure your business is protected throughout the bankruptcy proceedings.


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