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What is Chapter 11 bankruptcy, and when is it necessary?

On Behalf of | Aug 12, 2022 | Chapter 11 Bankruptcy

There are several types of bankruptcy available for California consumers and businesses. While many people are familiar with Chapter 7 and Chapter 13, Chapter 11 bankruptcy is not as well known. It’s important to know what it entails.

What is Chapter 11 bankruptcy?

Chapter 11 bankruptcy is most often used by large corporations to help reorganize debts so they can pay back their creditors when they are struggling financially. This type of bankruptcy was widely used by car manufacturers during the recession of 2008. Many manufacturers had financial troubles and would have gone out of business if they hadn’t filed for Chapter 11 bankruptcy.

With Chapter 11 bankruptcy, companies are able to continue operating while their finances are restructured so that they can afford to pay their bills. Just like with other forms of bankruptcy, once an automatic stay goes in place, debt collectors are required to stop making calls to collect on debts the business owes.

How does Chapter 11 bankruptcy work?

After the business files for Chapter 11 bankruptcy, creditors can devise a reorganization plan for debt repayment. This plan outlines the debts owed and includes smaller amounts to be paid to satisfy the debt. If the plan is accepted, the business begins to pay back the debt.

Sometimes, an agreement is not reached on a reorganization plan, so the business can ask the court for a cram-down. This means that the judge forces the creditors to accept the plan as is.

Repayment has no set limit of time, but on average, most businesses take around six months to two years to repay their debts.

There is also a filing fee associated with Chapter 11 bankruptcy due to its complexity. Businesses that choose to deal with debts with this option might have to pay even more on legal fees, but Chapter 11 can help keep a struggling company afloat.