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What is Chapter 11 Bankruptcy?

What is Chapter 11 Bankruptcy?

What is Chapter 11 Bankruptcy? Orlando Florida attorneys Eric Lanigan and Roddy Lanigan give the fundamental explanation about what Chapter 11 bankruptcy is and who is eligible to file a Chapter 11.

A Chapter 11 bankruptcy is the first thing that many people consider when they have more debt than they have income as individuals or as businesses. A CEO often thinks of bankruptcy when a small or a large business is about to go under because of pushy creditors.

You may have tried loans, equity lines, credit cards, payday loans or all of the above out of desperation. But when the bank won’t loan you any more money, and you’ve maxxed out the credit cards you might be thinking about filing bankruptcy.

Chapter 11 Bankruptcy Fundamentals

Businesses of all sizes and high worth, high income individuals generally are those who will file a Chapter 11 bankruptcy.

A Chapter 11 bankruptcy is considered when:

  • Debt outweighs income
  • No new revenue is expected
  • Creditors are demanding payment or property
  • Creditors can call in debts that will ruin the company or individual
  • The business will fail without bankruptcy protection

Shift of Power After Filing

When you file a Chapter 11 bankruptcy there is a fundamental shift of power because creditors lose their individual collections rights.

Now, when Chapter 11 bankruptcy is filed, creditors have to deal with the bankruptcy estate which is still operating but for all creditors, not just one.

The business continues operations—which you read about in the news all the time–and all similarly situated creditors are treated equally.

Automatic Stay Freezes Creditors

All collections stop with the automatic stay, which allows business to operate without fear that an aggressive creditor will levy on bank accounts or seize assets.

Debtor in Possession

The cost of bringing in an outsider to run the business is very expensive and probably would cause the business to immediately collapse. Therefore, the law keeps the existing owner or management team to continue to operate under the court’s oversight.

The debtor in possession runs the business, examines creditor claims and decides on those it will oppose. A debtor in possession can be removed for cause—fraud, dishonesty, or gross mismanagement, a heavy burden and there must be extreme gross mismanagement.

Sometimes there’s a middle ground where the bankruptcy court appoints an examiner. Not to run the company but to review the debtor in possession’s activities.

First Day Orders

There are many business day to day activities that have to be Housekeeping orders to ensure that a business runs smoothly includes activities like:

  • Hire a debtor’s attorney
  • Pay employees regular wages
  • Set terms for use of business revenues

No matter what you can’t wait too long because the bankruptcy judge will not re-litigate any decision already made. For example, a creditor goes after assets and you lose them. You can’t file bankruptcy and get the assets back because it will be too late.

There is no reason for putting it off, get in to see a skilled bankruptcy attorney quickly to keep your options open and to save your business and property if possible.

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