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A Bankruptcy Attorney Explains Chapter 11 and Chapter 7 for Businesses

A Bankruptcy Attorney Explains Chapter 11 and Chapter 7 for Businesses

Filing for bankruptcy can be a difficult decision for any business owner. As a bankruptcy attorney, I often meet with small business owners who are facing financial hardship and need advice on whether Chapter 11 or Chapter 7 bankruptcy is the best option. I know this can be an overwhelming process, so I wanted to write a helpful guide explaining the key differences between these two chapters of the bankruptcy code.

Chapter 11 Bankruptcy

Chapter 11 is often referred to as “reorganization bankruptcy.” The goal is to restructure your business’s debts so you can continue operating and pay back creditors over time. This allows you to come up with a court-approved repayment plan without having to liquidate the business.

To be eligible for Chapter 11, your business must have a reliable source of income to pay back debts under the proposed repayment plan. This chapter is commonly used by larger companies, but can also benefit small businesses in some cases.

Some of the key benefits of Chapter 11 bankruptcy include:

  • You can continue operating your business as usual. Existing contracts and leases can be affirmed or rejected.
  • An automatic stay is imposed, preventing creditors from collecting debts or taking action against your business during the bankruptcy process. This gives you time to reorganize.
  • Debts can be restructured and repaid over 3-5 years under the court-approved repayment plan. Unsecured debts may only be repaid at a percentage.
  • You maintain control of business operations as the “debtor in possession.” But major decisions need court approval.
  • Certain debts incurred after filing for bankruptcy receive priority repayment status.

The downsides of Chapter 11 are that it can be expensive and the success rate is low. Many cases end up being converted to Chapter 7 liquidation. It also requires extensive legal and accounting expertise.

But for businesses with high debts and valuable assets, Chapter 11 can be preferable to Chapter 7. It gives you a chance to fix underlying problems and emerge healthier without having to close up shop.

Chapter 7 Bankruptcy

Chapter 7, or liquidation bankruptcy, involves closing your business and using the proceeds to pay back creditors. A trustee is appointed to oversee liquidating business assets and distributing funds to creditors.

Chapter 7 is typically faster and less complex than Chapter 11. It’s designed for businesses that are no longer viable and need a fresh start. But it does mean shutting down and selling all assets.

Key things to know about Chapter 7 bankruptcy:

  • All business assets are liquidated, with proceeds distributed to creditors. You must stop operating the business.
  • Most types of business debts are discharged. But there are exceptions like taxes, fraud debts, and recent cash advances.
  • Lawsuits and creditor collection activities are halted with the automatic stay. Creditors must cease contact.
  • You may be able to exempt some business assets from liquidation depending on state law. For example, equipment used for trade or profession.
  • The business owner’s personal assets are usually not impacted, unless there were personal guarantees on business loans.
  • The whole process typically takes 3-6 months and is less complicated than Chapter 11.

For businesses that are no longer profitable, Chapter 7 can provide a relatively quick and complete fresh start. But it does mean shutting down the business for good.

How An Attorney Can Help

As a business owner, deciding between Chapter 11 and Chapter 7 bankruptcy can be difficult. That’s why working with an experienced bankruptcy attorney is so important. Here are some of the key ways an attorney can help:

  • Analyze your situation – We’ll conduct a full financial analysis to determine which chapter provides the best path forward for your business. This includes reviewing assets, debts, contracts, leases, and sources of income.
  • Explain the process – Every bankruptcy case is unique. Your attorney will explain exactly how the process works and what you can expect in your specific situation. We’ll address all your questions and concerns.
  • File paperwork – Bankruptcy involves extensive, precise documentation. Your attorney will handle preparing and filing all the required petitions, statements, schedules, and plans.
  • Represent you in court – We’ll appear on your behalf at all required court hearings and proceedings. This includes negotiating with creditors for you.
  • Help maximize assets – If some assets may be exempt from liquidation, we’ll advise you on how to protect those assets for your fresh start.
  • Provide legal guidance – Experienced bankruptcy lawyers have in-depth knowledge of the complex bankruptcy code and processes. We can provide the legal guidance business owners need.

The bottom line is that an attorney who specializes in business bankruptcies can optimize the process for your unique situation. We help turn this difficult time into an opportunity to restructure your business successfully or gain a fresh start.

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