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When can an individual file for business bankruptcy?

Tennessee consumers generally have two main options for filing for bankruptcy: Chapter 7 and Chapter 13. What many do not know, however, is that there is another option, but it is used quite rarely. Chapter 11 is generally reserved for a business bankruptcy, but individuals can use it in certain situations.

Chapter 11 was approved for individuals in 1991, but it is not typically used by consumers. In fact, only 1 out of every 1,000 consumer bankruptcies are Chapter 11. This is because most people don't qualify. Chapter 11 requires significant cash flow after bankruptcy, along with a plan to reorganize and pay off debts. Most consumers file for bankruptcy, however, because they face financial challenges, including cash flow issues. That's why this type of bankruptcy is reserved for those who can significantly increase their earnings, such as celebrities or investors. It's not uncommon for someone of this nature to make a bad investment and end up losing millions of dollars.

Chapter 11 is more expensive and time-consuming than Chapter 7 or Chapter 13. However, these two types of bankruptcy come with debt limits, and if a consumer has high debt but high earning potential at the same time, then Chapter 11 is the only option. Chapter 11 is also the most debtor-friendly bankruptcy option, so individuals can use this option to shrink their debt through a restructuring plan approved by the court.

There are pros and cons to every type of bankruptcy. A good choice for one person may not be an appropriate option for someone else. Therefore, it's wise for those considering bankruptcy to seek advice from a bankruptcy attorney who can inform clients of their options.

Source: FindLaw, "Chapter 11 Bankruptcy," accessed Jan. 18, 2015

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