For businesses and people who own businesses, burdensome debt and faltering income can be challenging in the same way it is for individuals. When a business comes to the end of its financial rope, bankruptcy begins to show up on the radar of possibilities. Fortunately, bankruptcy can provide necessary relief for businesses on the brink of collapse.

The form of bankruptcy most often file for is Chapter 11 bankruptcy. Chapter 11 bankruptcy, as some readers may know, is similar to Chapter 13 bankruptcy in that its purpose is to help companies pay off creditors while reorganizing business operations to be more viable after bankruptcy is completed. As part of the bankruptcy process, businesses become a “debtor in possession,” which requires the business to keep possession and control of its assets and to act as a fiduciary in handling the duties a trustee would normally perform in a bankruptcy case. 

As part of Chapter 11 bankruptcy, a debtor business must come up with a plan of reorganization and file it with the court. As part of the plan, the business must provide a classification of claims and how each class of claims is going to be handled. The reorganization plan must be approved by the court and then actually carried out under court supervision.

Chapter 11 bankruptcy is an opportunity not only to pay off and discharge debts, but also to modify a company’s business model to make it more effective going forward. This is particularly important in cases where bankruptcy is the result of an ineffective business model. In our next post, we’ll continue this discussion by looking at a recent bankruptcy case involving such a situation.