What is a Chapter 11 bankruptcy?

If you own a New Jersey business that is failing due to too much debt and not enough profit, you and it may be a candidate for a Chapter 11 small business bankruptcy. As FindLaw explains, you qualify if you employ no more than 500 people and your business has less than $2.19 million in debt.

Somewhat similar to a Chapter 13 personal bankruptcy, the purpose of a Chapter 11 is not to discharge your company’s debts, but rather to make your business profitable once again. It gives you the opportunity to renegotiate your company’s contracts, leases, etc. on more favorable terms, thereby reducing the amount of outstanding debt for which your business is liable.

Your bankruptcy plan

Once you file for Chapter 11, you have 180 days during which to establish a reorganization plan for your company. Its creditors cannot attempt to collect their debts during this six-month period. Rather, they must negotiate with you regarding what your company owes them, after which they must vote on whether or not to accept your reorganization plan. If they do, the bankruptcy judge will approve your plan.

Classifications of creditors

Under a Chapter 11 bankruptcy, your creditors are segregated into the following three categories:

  1. High priority: These creditors include the IRS and the New Jersey Department of Revenue, your company’s stockholders, and any of your employees to whom you owe back wages.
  2. Secured: These creditors have collateral that secures your debts to them.
  3. Unsecured: These creditors have no collateral to back your debts.

While each of your high priority and secured creditors makes up its own respective class, your company’s unsecured creditors make up one en masse class. Consequently, you negotiate with your high priority and secured creditors individually and with your unsecured creditors as a group.

Repayment and discharge

After the bankruptcy judge approves your reorganization plan, you and your company go about conducting business as usual and repaying the creditors per your plan. The bankruptcy court discharges any of your company’s debts not covered in your plan.

While you should not take this information as legal advice, it can help you understand the Chapter 11 process and what to expect.

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