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What does it mean to reorganize in a Chapter 11 bankruptcy?

For some businesses, filing for a Chapter 11 bankruptcy is the best option for maintaining operations. While most entities applying for this option will be either partnerships, limited liability companies or corporations, it is possible for you to file Chapter 11 as an individual.

As the U.S. Courts point out, any entity filing for Chapter 11 is considered a debtor in possession, because you can keep property and assets while going through the process. On rare occasions, however, the court may appoint a trustee to take over assets.

The main part of the process is putting together a plan for reorganization. You must file the plan with the court within four months of filing for Chapter 11, though some entities may be eligible for an extension. The plan should demonstrate how the business will be able to pay its obligations to any creditors. For many, this may include downsizing or even selling off assets to free up money.

The court will typically approve your plan if all of the following are true: 

  •        The plan is in the best interest of the creditors in that they would receive as much in a Chapter 11 as they would in a Chapter 7.
  •        The plan has been made in good faith.
  •        The plan is likely to succeed.

The plan must also be fair and equitable. In other words, any secured creditors must be paid an amount that matches at least the value of the collateral at stake. Additionally, you are not able to keep equity interests until all the debts are paid in full.

Filing for bankruptcy should not be taken lightly, and you should consult with a professional to determine if this is the right option for you. While this information may be useful, it should not be taken as legal advice.

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