Business owners may unexpectedly encounter turbulent financial waters and wonder what they can do to keep their enterprise afloat. When debt becomes overwhelming, filing for bankruptcy can be a suitable debt management option. However, business owners should know that not all bankruptcies are created equal. Choosing the right bankruptcy chapter to file under is crucial, as it will help to determine the future of the business and the treatment of existing debts.
Among the options available, Chapter 11 bankruptcy is often a good choice for business owners looking to reorganize rather than dissolve their enterprises. Understanding what Chapter 11 bankruptcy entails can empower business owners with the information required to determine whether it aligns with their enterprise’s needs.
What is Chapter 11 bankruptcy?
This form of debt relief option is primarily designed to enable businesses to continue operations while the court reorganizes their debts. By filling this chapter, business owners in debt need not worry about dissolving their business to pay off creditors. Businesses get to choose a suitable plan to repay creditors over time between:
- Renegotiating contracts
- Reducing overhead costs
- Selling off non-essential assets
- Adjusting payment terms with creditors
Once the bankruptcy court and majority of creditors approve the debt restructuring plan, the business can embark on a debt repayment journey with the goal of emerging from bankruptcy in a stronger financial position.
When is Chapter 11 the right choice?
This debt restructuring plan can be appealing to entrepreneurs whose businesses are worth saving. Chapter 11 empowers such business owners to modify their operational structure to help them deal with their overwhelming debt. A business that has a high potential for recovery is one that, despite temporary financial difficulties, has:
- A strong customer base
- Valuable assets
- A promising future
Chapter 11 can give such businesses the breathing room they need to wade out of turbulent financial waters. It’s also worth mentioning that this debt restructuring plan allows business owners to retain control over their business.
Deciding which chapter of bankruptcy to file can be a difficult decision for any entrepreneur. Business owners overwhelmed by debt can benefit from appropriate legal guidance when deciding whether a debt repayment plan will meet their needs. Ultimately, the right choice depends on the specific circumstances of a business, its debt load and its long-term viability.