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Is Chapter 11 bankruptcy similar to Chapter 7 bankruptcy?

Many of the posts on this Garnerville bankruptcy law blog address matters related to personal bankruptcy and the tools individuals can utilize to improve their financial situations. Today's post looks at the similarities and differences between a form of bankruptcy commonly used by businesses and those forms of bankruptcy generally used by private parties. In the business and commercial world, Chapter 11 bankruptcy is a way to keep an entity's doors open while also addressing sensitive issues related to outstanding debts.

Chapter 11 bankruptcy is generally used in lieu of other bankruptcy formats for corporate bankruptcy filings because it does not require a business to close its doors. Businesses that want to close and want to settle their debts with their creditors can file for Chapter 7 bankruptcy. Doing so does end a business's existence, however, and business owners who want to keep their operations going have to opt for other bankruptcy options.

Under a Chapter 11 bankruptcy filing, a business submits a reorganization plan that shows how the business will become profitable in the future. Similar to the requirements of a Chapter 13 bankruptcy, a business subject to a Chapter 11 process must include in its plan ways that it will pay off its outstanding debts to its creditors.

Businesses generally do not have to sell assets to satisfy these debts, and if a bankruptcy court approves a reorganization plan, a business's debts will be satisfied so long as it abides by the terms of its plan.

While a business may satisfy its debts under a Chapter 7 filing as well as a Chapter 11 filing, only in a Chapter 11 filing will the business be able to stay open. A Chapter 7 bankruptcy filing results in an entity going out of business. However, with a good reorganization plan, a business subject to a Chapter 11 filing can keep on operating under an effective reorganization plan.

To understand options regarding business finances and methods to deal with business debts, it is important to understand the various types of debt relief. Filing for bankruptcy is a major decision and business owners should be well informed about the process and how it could impact the business in the future.

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