Meghan Sanders

- George Allen

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The Bankruptcy Option for Businesses

Also known to some as the ‘rehab’ of bankruptcy chapters, Chapter 11 bankruptcy allows for businesses of all kinds to reorganize and while not exonerating the debts owed, the business will remain in operation and the terms of the debt(s) will be restructured and paid off with future earnings.  If a business were to file for Chapter 7 bankruptcy, it must discontinue any and all operations and an appointed trustee must sell all assets and pay off debts to creditors with proceeds made from sold assets.

Like Chapter 7 bankruptcy, there is a wait period until the next time you can file for bankruptcy (as a business or individual). There is also the consequence of a Chapter 11 bankruptcy filing remaining on your business’ credit reports–yes, businesses too, have credit reports–and during that time no other bankruptcy filings are allowed. Consequentially, the biggest downside to filing for Chapter 11 bankruptcy is that if you do not carefully manage your credit after filing, there will be no bankruptcy protection available to help you out until 7 years down the road–yikes!

Filing for Chapter 11 bankruptcy is a much more involved process than Chapter 7 bankruptcy filings. For instance, since Chapter 11 bankruptcy deals with businesses of all sizes, if a business is a publicly traded company, it will immediately be removed from the stock markets and listed as “over-the-counter” stocks–meaning the stock can only be traded through a dealer network.

Other aspects of Chapter 11 bankruptcy involve elements such as “automatic stay”, which holds that any debts owed after the file for automatic stay is made, are put on hold. This also maintains that any attempts to collect from creditors or debt collection efforts after petitioning are considered void. There is also the option to cancel any currently enacted contracts that would be financially beneficial to the business filing for Chapter 11 bankruptcy. This includes contracts anywhere from labor unions and real estate leases to currently contracted vendors or any operating contracts with vendors and customers.

Individuals do have the option to file for Chapter 11 bankruptcy, and typically do so when Chapter 7 and Chapter 13 bankruptcies are not an option, or if the individual is of high-income and/or has complex debts related to a business.

Aside from the usual repercussions filing for bankruptcy can cause, filing for Chapter 11 bankruptcy, like the other bankruptcy options, can lower your credit score anywhere from 200-350 points! Luckily, for businesses, corporations and individuals alike, repairing your credit is possible.

A few tips to managing your credit after filing for Chapter 11 bankruptcy are to create a budget and stick to it. You will also want to take a careful inventory of any and all assets that are left after the bankruptcy has been closed and discharged. Lastly, you will want to make sure you are proactive to rebuild your credit slowly and responsibly.

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