Although it is commonly used for larger corporations, Chapter 11 bankruptcy can be a useful tool for small business owners in the right circumstances. Through Chapter 11, you are given a temporary reprieve from all collections actions while you reorganize your business structure and seek out new revenue sources.
It is important to also note that Chapter 11 is one of the most complex, time-consuming and costly forms of bankruptcy. Depending on your plans for your business entity, it may not be viable or appropriate, particularly if you do not intend to continue with operations. Before filing, take some time to fully understand your options and evaluate what is the best fit for your business.
Chapter 11 involves renegotiating terms of current debts with creditors over a 180-day period (versus 15 days for Chapter 7). When you file, you will have to submit balance sheets, statement of operations, cash-flow statements and a copy of the most recent Federal tax return for your business. Each case is also assigned a U.S. trustee, who oversees your debt reorganization.
Small businesses make up the majority of Chapter 11 bankruptcy filings, but that doesn’t reflect how many actually complete the reorganization process. Even after you file and begin reorganization, the bankruptcy courts may determine that your business is not profitable enough and transition it into a Chapter 7 liquidation plan. In Chapter 7, your business will have to close its doors to pay back your creditors.
Whether you decide Chapter 11 or Chapter 7 is the best option for handling your business debt, the process can be complex. It may be in your best interests to seek advice and representation from an experienced bankruptcy lawyer.
Source: FindLaw, Chapter 11 Bankruptcy, last accessed April 9, 2015