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How business owners may prepare for Chapter 11 bankruptcy

On Behalf of | Mar 19, 2022 | chapter 11 bankruptcy |

Business owners unable to meet their debts may restructure their liabilities with a Chapter 11 bankruptcy. Unlike Chapter 7, which includes liquidation, Chapter 11 allows debtors to keep their existing assets. By filing for a reorganization through Chapter 11, businesses could become financially viable again.

The United States Bankruptcy Code provides petitioners with 120 days to create a reorganization plan. The affected creditors form a committee and vote on the plan’s approval. Until the creditors approve the reorganization plan, a business exists as a “debtor in possession,” as noted by Cornell Law School’s Legal Information Institute.

A debtor in possession’s rights and responsibilities

After opening a Chapter 11 case, the court establishes a debtor’s bankruptcy estate, which consists of properties governed by a contract. As a debtor in possession, borrowers hold assets on behalf of their creditors.

According to the U.S. Department of Justice, a debtor owes a fiduciary duty to creditors rather than business owners or shareholders. A debtor must continue operating and using its creditors’ assets to generate revenue. The goal is to repay those creditor obligations as approved under the reorganization plan.

Negotiations and vote approvals before filing

The Internal Revenue Service’s website notes that debtors may negotiate with their largest secured and unsecured creditors before filing their cases. By preparing for their bankruptcies in advance, debtors may obtain the votes necessary to confirm their reorganization plans. Once approved, the plan becomes a binding contract.

Chapter 11 bankruptcy offers businesses a means to overcome temporary financial struggles. By reorganizing its debts, a business may keep its assets after negotiating a workable payment arrangement.

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