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A closer look at Chapter 11 bankruptcy


This blog recently discussed the helpful nature of Chapter 11 bankruptcy for struggling businesses. Chapter 11 bankruptcy can be a complex process, so it is important that businesses considering the commercial bankruptcy process understand how it works before filing.

One of the primary advantages of Chapter 11 bankruptcy is that it allows the struggling business to continue to operate. Companies including United Airlines, General Motors and K-mart, among many others, have used the Chapter 11 bankruptcy process to return to profitability. In most cases, the business is permitted to continue to operate. In some circumstances, such as cases of fraud or gross incompetence, a trustee will run the business during the bankruptcy process.

All decisions made during the Chapter 11 bankruptcy process, however, require approval of the court. Actions that require approval of the court include the sale of assets other than inventory; beginning or ending a rental agreement; and expanding or terminating business operations. In addition, the filing business cannot take out a loan without permission from the court until the process is complete.

The company filing for bankruptcy has the opportunity to propose a reorganization plan for the debts of the business. The plan must be feasible, fair and in the best interests of the creditors. If the plan meets these requirements, the court will approve it. The plan may include reducing the size of the business's operations, reducing expenses and renegotiating debts. Once the court has approved the reorganization plan, the company can move forward according to the plan.

Provided the company sticks to the bankruptcy plan, it has the opportunity to obtain debt relief through the process and return to profitability. There are different options to explore when considering the bankruptcy process, including liquidation bankruptcy options as well, which is why it is important to fully understand what resources may be available in different situations.

Source: Investopedia, "Chapter 11," Accessed March 6, 2017

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