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Can Small Businesses Benefit from Chapter 11?

Chapter 11 is usually the most complex form of bankruptcy. And in legal issues, complex can often mean expensive. But for certain small businesses with less than $2,000,000 in debt, a fast tracked Chapter 11 may be a realistic option that allows a business owner to gain the benefits of bankruptcy while continuing to do business and without liquidating business assets.

Chapter 13 bankruptcy is only available to individuals. It may be an option for some businesses operating as sole proprietorships. But in most cases, businesses must choose between a liquidating bankruptcy under Chapter 7 and reorganization under Chapter 11.

While Chapter 7 bankruptcy may be the best option in cases where a business has decided to throw in the towel and dissolve, for those who want to continue doing business after bankruptcy, Chapter 11 is often the way to go. This is because it stays collection actions and allows businesses to retain possession of their assets and continue to operate during reorganization. It also allows them to renegotiate contracts that have become financially problematic. But it won’t solve deep problems such as a lack of demand for the product or service so it is important for business owners to consider their realistic prospects of success following Chapter 11.

Of course Chapter 11, like all forms of bankruptcy, has some risks and downsides. It can impact a business’s credit and will usually cause creditors to view it as a credit risk. This may lead to higher borrowing costs and limited access to credit. The impact of numerous collection actions, however, can be just as bad and can cost far more in legal fees than simply confronting debtors head on through Chapter 11.

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