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How Chapter 11 bankruptcy helps struggling small businesses

On Behalf of | Aug 11, 2023 | Bankruptcy Law

When an entrepreneur starts a small business or someone takes over an existing company, they tend to invest quite a bit of their time and resources in the creation and development of the company. They may also take on certain risks, including personal responsibility for certain debts.

Many entrepreneurs reap the benefits of such investments when a company becomes successful and provides them with a steady stream of income. Others are less fortunate and may have to worry about their personal assets or future income because the company they have started has failed or fallen behind on financial obligations.

When creditors threaten to sue or possess property, a struggling business could end up on the cusp of failure. A Chapter 11 bankruptcy filing can be a way for a small business owner to protect their personal assets and potentially save the company from dissolution.

Bankruptcy helps to resolve major debts

The most immediate benefit of initiating a Chapter 11 bankruptcy filing is that the courts issue an automatic stay that takes effect the same day that someone submits paperwork to the courts. Pending lawsuits and attempts to repossess property will typically stop until the courts resolve the bankruptcy filing or any subsequent special requests initiated by individual creditors.

The trade-off for that relief is that the company will face court oversight for everything from banking to the sale of assets. Chapter 11 bankruptcy allows someone to restructure their business and possibly renegotiate some of the debts owed by the company and its owner. The courts can help facilitate negotiations with creditors to create workable payment plans.

In many cases, successful bankruptcies will result in a discharge of certain debts. The limit for the total debts in a small business Chapter 11 filing is $3,024,725, and at least 50% of the total debt should result from business activity. A business owner who personally signs as the guarantor for a loan they worry about their assets or future income when the company begins struggling and creditors come calling.

A Chapter 11 filing is one of the fastest and most effective means of preventing collection activity and regaining control over organizational finances. Learning more about this complex form of business bankruptcy can help owners and executives make informed decisions on behalf of a struggling company.