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Understanding how Chapter 11 bankruptcy can help

This blog recently discussed bankruptcy options for businesses, which is an important topic for struggling companies to be familiar with. A Chapter 11 business bankruptcy filing typically allows the company to continue under its current management. Unlike a Chapter 7 bankruptcy filing, which is an option for companies going out of business to consider, a Chapter 11 business bankruptcy filing is an option to help the company remain in business and return to profitability. After the bankruptcy filing, an automatic stay goes into effect halting creditor collection actions.

Approximately 20 to 40 days later, the first meeting of the creditors is held. A representative of the company must attend and will be asked questions about the company's assets and liabilities and income and expenses. The creditors may inquire about the financial condition of the company. A creditors committee is then established, which typically includes representatives from 7 of the company's largest unsecured creditors. The committee works with the company to draft a reorganization plan.

Once developed, the reorganization plan typically divides creditors into classes and must be voted on. Even if the plan is not approved by creditors or by the necessary number of votes, if the court determines the plan is fair and equitable and does not unfairly discriminate, the court may confirm the plan. A Chapter 11 bankruptcy reorganization plan allows the company to repay creditors over a reasonable period of time and repayment of secured debts can sometimes extend over a period of 20 or 30 years.

The Chapter 11 reorganization process can help a company facing financial difficulties get back on its feet. Because there are important timelines associated with the sometimes complex process, it is helpful for companies to have trained guidance and a thorough understanding of how the process can help them for the health and recovery of their business.

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