3 Reasons Companies File Chapter 11 Bankruptcy in California It might seem like there is an obvious reason to file Chapter 11 bankruptcy: your company is struggling with a period of financial difficulty. Unfortunately for business owners, making the decision to file Chapter 11 is not necessarily that simple or straightforward. Filing Chapter 11 is a major decision with long-term implications for your business, so it is vital to thoroughly explore all potential avenues when determining whether Chapter 11 is truly the most effective and most appropriate option. Depending on factors like how the business entity is structured, how much debt you have incurred, and your vision for the future of the company, it may be more cost-efficient to file Chapter 7, file Chapter 13, or even weigh alternatives to bankruptcy for businesses, such as arranging an out-of-court “workout” with your creditors. At The Bankruptcy Group, our trusted legal team includes not only Sacramento Chapter 11 attorneys, but also Sacramento Chapter 7 lawyers and Sacramento Chapter 13 attorneys, enabling us to give you a detailed comparison of the potential outcomes that could result from each approach. While it is impossible to say which type of bankruptcy is best for your business without first discussing your company’s financial situation, Chapter 11 might be right for your company if…
You aren’t a sole proprietor. Federal bankruptcy regulations prohibit business entities like corporations and limited liability companies (LLCs) from filing Chapter 13 bankruptcy, leaving Chapter 7 and Chapter 11 as the primary bankruptcy options for business owners who are not sole proprietors. If you are a sole proprietor, contact our Folsom Chapter 13 lawyers to talk about whether filing Chapter 13 is the right option.
Lawsuits are costing your company money. It is common for businesses to file Chapter 11 after litigation has been threatened or initiated. If the cost of defending your company is placing a financial strain on the business, Chapter 11, which generally stops pending litigation due to a federal provision called the “automatic stay,” could provide relief, provided avoiding litigation is not your only reason for filing, which could potentially lead to dismissal of your case for dealing in bad faith. While other types of bankruptcy also afford debtors the benefits of the automatic stay, which pauses debt collection – including the repossession of industrial equipment and foreclosure on commercial property – you may want to rule out Chapter 7 and focus on Chapter 11 if…
You want to continue operating the business. Whether used for a business or an individual, Chapter 7 is a liquidation bankruptcy. However, unlike individual debtors who can protect their property from liquidation with bankruptcy exemptions, businesses do not have this option. If you file Chapter 7 for your business, the company’s assets will be liquidated, resulting in closure of the business. If you wish to put an end to the business, Chapter 7 may be a suitable option. However, if your intent is to keep the business running, Chapter 11 is a more appropriate approach. Chapter 11 is a complicated and rigorous process, but if you manage your bankruptcy carefully and effectively, your business can emerge from Chapter 11 successfully and go on to become profitable again.