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Understanding Chapter 11 bankruptcy

At William H. Oliver, Jr. & Associates in New Jersey, we know how difficult your life becomes when the business you own begins to fail because it has an overabundance of debt and insufficient profit with which to pay it. Often in these situations, filing for Chapter 11 bankruptcy may be your best strategy.

As FindLaw explains, you likely qualify for Chapter 11 bankruptcy if your business has a debt of less than $2.19 million and you employ fewer than 500 people. Chapter 11’s purpose is not to discharge your company’s debt, but instead to help you make your company profitable again through reorganization. Once you file for Chapter 11, you have the opportunity to renegotiate all of your company’s leases and contracts. Often you can obtain more favorable terms and consequently reduce your company’s debt.

Bankruptcy plan

Within 180 days of filing for Chapter 11, you must establish your company’s reorganization plan. Your business creditors cannot harass you with debt collection calls and letters during this period. Instead, you and they negotiate the amount and terms of your company’s debt with them. Once negotiations conclude, your company’s creditors vote on your business reorganization plan. After they approve it, the bankruptcy judge also must approve it.

Creditor classifications

Per the rules of a Chapter 11 bankruptcy, your creditors are divided into three categories as follows:

  1. High priority creditors: the IRS, the New Jersey Department of Revenue, your stockholders and any employees owed back wages
  2. Secured creditors: your company’s creditors that hold collateral securing your debt
  3. Unsecured creditors: your company’s creditors that hold no collateral

Each of your company’s creditors in the first two categories is its own separate class. Your company’s unsecured creditors, however, make up a joint and mutual class. The result of this is that you negotiate with your unsecured creditors en masse, but with your other creditors individually.

Working your plan

After your company’s creditors and the bankruptcy judge approve your Chapter 11 reorganization plan, you continue operating your business, paying its creditors in accordance with your plan. At the termination of your bankruptcy period, the court discharges any business debts not covered by the plan.

For more information on this subject, please visit this page of our website. 


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