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What is a debt reorganization plan in Chapter 11 bankruptcy?

Personal debt is quite a bit different than business debt. For most individuals, Chapter 7 bankruptcy is the best solution for dealing with burdensome debt, because this process allows the filer to wipe out most debts and start from scratch. But, the perceived negative aspects of a Chapter 7 bankruptcy, like taking a hit on a credit score and losing assets, may not part of the solution for businesses. Businesses are oftentimes in a bit of a better position to correct their financial problems, and that is why many businesses go through the Chapter 11 bankruptcy process.

One of the key parts of a Chapter 11 bankruptcy filing is the submission of a debt reorganization plan to the bankruptcy court. As businesses investigate whether or not Chapter 11 bankruptcy is a legitimate option in their unique situation, many of the decision makers may be thinking, "What is a debt reorganization plan?"

Put simply, the debt reorganization plan is a proposed effort to classify the creditors who will be effected by the bankruptcy filing and how the business will ultimately pay back either all or a portion of the debt owed. Oftentimes creditors themselves are involved in the crafting of this plan, because even though no creditor wants to get paid less than what they are owed, they have a vested interest in making sure that the business in question remains open instead of dissolving and filing for Chapter 7 bankruptcy - if the business stays open, the creditor will at least get some portion of their loan back.

Debt reorganization plans tend to be quite complicated. A full list of disclosures needs to be part of the bankruptcy filing as well, so it is important for business owners and decision makers to be sure that they know what steps need to be taken in order to get the bankruptcy filing right the first time.

Source: uscourt.gov, "Reorganization Under the Bankruptcy Code," Accessed on Nov. 29, 2014

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