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5 Things To Know About Chapter 11 Bankruptcy

1) Automatic Stay:

As soon as the bankruptcy petition is filed with the court, the automatic stay goes into effect. The automatic stay prevents creditors from taking certain actions against your business. For instance, no further legal action can be brought against your business, including an attempt to collect a debt, repossess or foreclose property, or enforce a lien against your property (with certain limited exceptions). Certain creditors (such as a mortgage or secured creditor) can request that the bankruptcy court grant them an exception from the automatic stay in order for them to repossess or foreclose property. If granted, you may be required to continue making monthly payments to the creditor, although these payments are usually lower than the normal monthly payment, or file a plan to repay the loan within a reasonable time frame.

2) Ability to break leases and contracts:

The Bankruptcy Code allows businesses and individuals to break leases or contracts that are no longer advantageous to the business or individual that filed the bankruptcy petition. The Bankruptcy Court must approve such decisions, but if it’s in the best interest of the business to do so, leases may need to be broken. When broken (or rejected in bankruptcy terms), the opposing party to the contract or lease has the right to file a Proof of Claim to assert damages as a result of the breach. Usually these damages are paid out in the Plan of Reorganization, are usually substantially less than they would be outside of the bankruptcy, and are usually paid out at a fraction of what is owed.

3) Ability to cancel foreclosures/repossessions, deal with tax debts and payroll issues:

The Automatic Stay can prevent further action from being taken by creditors, including the IRS, state, and local departments of revenue. The Bankruptcy Code also allows businesses and individuals to repay arrears amounts and past due taxes (including payroll taxes) over successive years with no penalties.

4) Chapter 11 Discharge:

Discharge is the goal of every business or individual that files for relief under the Bankruptcy Code. In Chapter 11’s, the discharge takes effect when a plan of reorganization of the business or individual (debtor) is accepted by the creditors and confirmed by the court. After confirmation, the debtor must make payments according to the terms of the plan and abide by its provisions. The plan of reorganization creates new contractual obligations, but usually absolves the debtor (discharges) from the obligation to repay certain unpaid debts incurred prior to the petition date. Certain exceptions apply and only your attorney can advise you which debts are and are not discharged, and what your best course of action is.

5) Chapter 11 Plan of Reorganization:

The Plan of Reorganization is essentially a contract between the debtor and its creditors to repay certain debts over an agreed upon period of time and continue business operations. A Plan of Reorganization can also be thought of as a restructuring of financial affairs. A Plan of Reorganization can change amortization periods, interest rates, payment periods, and balloon payments, and can deal with all types of debts including secured, unsecured, and tax.

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