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Understanding the role of creditors in a business bankruptcy


A previous post here discussed business and commercial bankruptcy filings. One important aspect of the Chapter 11 business and commercial bankruptcy process is working with creditors and the meeting of the creditors. Once a petition for bankruptcy has been filed, a temporary stay goes into effect which prevents creditors from pursuing any collection actions. This period of time allows for the reorganization plan to be developed and contracts and leases with creditors can be renegotiated.

Creditors usually have an incentive to work with the filing party because if the filing party were to file for Chapter 7 liquidation business bankruptcy the creditors usually would not fare better than under a Chapter 11 business bankruptcy. Creditors are placed in different classes related to the handling of their claims. First priority is given to state and federal taxes owed, employees who are owed money and stockholders. Each is placed in their own class, as is true of each secured creditor. Unsecured creditors are all placed in one class. The reorganization plan may modify the amounts owed and repayment terms related to these creditors.

The reorganization plan that is developed must be voted on by the creditors and approved by the court. Provided the reorganization plan is reasonable, developed in good faith and complies with the law, it is likely the court will confirm it. Once the reorganization plan has been confirmed debts existing prior to it are discharged. The business filing for Chapter 11 bankruptcy must then comply with the repayment terms of the reorganization plan and repay creditors in accordance with the renegotiated agreements.

Chapter 11 bankruptcy provides an option and some flexibility for a struggling business. It is worth understanding the ins and outs of a business bankruptcy process and how it can help businesses wishing to return to profitability following a difficult period.

Source: Bankruptcy.findlaw.com, "Chapter 11 Bankruptcy," Accessed Oct. 18, 2016

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