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Understanding the basics of chapter 11 bankruptcy for your business

On Behalf of | Jul 29, 2022 | Chapter 11 |

In the midst of financial difficulties as a business owner, you may be weighing your options for bankruptcy. Having a general understanding of how different types of bankruptcy work can better inform your decisions on the future of your company. Here are some main points breaking down chapter 11 for businesses.

What is chapter 11?

Simply put, chapter 11 falls under the classification of a reorganization bankruptcy. Essentially, the reorganization plan includes things like ways to cut costs, make your business more profitable and deal with large amounts of debt.

The ultimate goal of chapter 11 is to remain open as a business and hopefully have more financial success in the future. This is important to note because it means that as a business owner, you can still run your business during this time period of filing for chapter 11 bankruptcy. In the future, you may also be able to take out loans for your business if the bankruptcy court allows.

What kind of organizations are eligible for chapter 11?

Both larger companies and small businesses are able to file for chapter 11 bankruptcy. The caveat is that depending on the size and situation of the small business, the court will assess the prospects of its future profitability. The court also considers the amount of debt that a business has. Keep in mind that the CARES Act increases those debt limit amounts.

What kind of information do you need when filing for chapter 11?

In compiling needed information for the bankruptcy court, a business must first provide financial documents including but not limited to:

  • Copies of federal income tax returns
  • Current cash flow records
  • Records of incoming funds and outgoing expenditures
  • Documents supporting your assets and liabilities

What to know about reorganization plans

The business owner, or “debtor” according to the court, is the one to submit a reorganization plan to the bankruptcy court for evaluation. The plan contains the steps that a business intends to take in order to restructure and become profitable and or financially stable. It’s an important component to the future of a business.

After reviewing the case, the bankruptcy court then makes a determination on approving the reorganization plan. In some cases, a court might find that the best choice for the business is to instead undergo chapter 7 bankruptcy which would be a complete liquidation of the business.