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What Happens to A Business Under Chapter 11 Bankruptcy?

Law Office of Ronald V. De Caprio Sept. 10, 2014

Many of the posts on this blog have addressed how New York consumers can approach bankruptcy as a method of finding solid financial footing. While individuals certainly make up a large portion of the cases in bankruptcy courts, businesses also face precarious economic times. While some bankruptcy methods overlap for both consumers and businesses, some are better tailored to one debtor population.

Chapter 11 bankruptcy is used primarily for large businesses but can work in specific cases for small businesses and individuals as well. This form of bankruptcy can be initiated by the debtor or one of its creditors. When a creditor starts a Chapter 11 process in bankruptcy court it is called an involuntary petition due to the debtor’s lack of initiation.

Under Chapter 11, a business generally goes on operating how it did before the petition was filed. However, the petition does require the debt-holding party to work out a plan for business reorganization that will yield profits in the future. That plan has to be approved by the bankruptcy court and when it is the business’s debts are released beyond what the debtor has agreed to pay to his creditors.

This form of commercial bankruptcy requires a corporate entity to keep detailed records of its operations and expenditures. Unlike Chapter 7 bankruptcy, Chapter 11 allows a company to keep its assets and reset itself with a new, effective business plan. There are costs associated with Chapter 11 bankruptcy, and trained bankruptcy attorneys can explain those costs to their clients who are interested in pursuing Chapter 11 protection.

When a business faces bankruptcy, it has options. One option is to close up and liquidate all of its assets. Another involves reorganizing to turn a profit in the future. Both methods can be effective depending on the goals of the entity. Chapter 11 is just one bankruptcy tool available to struggling businesses that can bring a about positive changes to companies both large and small.