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Is your business struggling? Should you consider Chapter 7 or 11?

Due to current events, your small business may be facing bleak prospects in the short term, no matter how strong your business is overall. Depending on your circumstances, this could be a good time to consider filing for bankruptcy.

If there is little hope that you can rebuild when circumstances improve, you might consider a Chapter 7 liquidation bankruptcy. However, if your business is up and running, you might instead take a look at a Chapter 11 reorganization.

Hotel basically sound but unfilled for now?  Commercial property generally profitable but not at the moment? Many small businesses are struggling, from contractors to realtors to service providers. Which chapter of bankruptcy you choose depends on whether or not your business would still be above water if it weren’t for the sudden downturn in the economy.

Chapter 7

A Chapter 7 bankruptcy involves liquidating your company’s assets. A bankruptcy trustee will gather up and sell all of the business’s assets and use the proceeds to pay claims by creditors and others in accordance with the provisions of the Bankruptcy Code.

Chapter 7 gives you a chance to end your business without substantial debt. Once your company’s assets have been sold to pay creditors, most remaining debts are discharged. There are some debts that are not discharged in bankruptcy, and you should discuss your situation with an experienced bankruptcy attorney to determine how effective Chapter 7 may be in your case.

Chapter 11

In what is called a “reorganization,” Chapter 11 gives your company a chance to reorganize its debt while continuing to operate. You or your creditors may propose a plan for reorganizing your obligations that is in the best interest of the creditors. This generally involves reducing expenses, downsizing the business, renegotiating debts and other strategies.

The owner, called a “debtor in possession,” continues to run the business as usual while working to pay down the debts. There are some limitations on your authority during the repayment period. For example, you will not be allowed to sell off assets, expand business operations or shut down the company without the court’s permission.

How do you decide which is best?

It is generally a matter of running the numbers. If your company would be operating as usual except for the economic downturn, you might do well to reorganize, shed some debt, and come out the other side in a stronger position. If circumstances show that your business will not survive despite reorganization, you may wish to try Chapter 7.

Talk to a bankruptcy attorney about what relief you qualify for and what you can expect from the process.

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