When a business is struggling to keep its doors open and pay its debts, its owners may decide to file for bankruptcy protection, a Chapter 11 bankruptcy, under the Bankruptcy Code. Chapter 11 bankruptcy provides for the reorganization of a partnership or a corporation.

Generally, the Chapter 11 debtor proposes a reorganization plan so it can keep its business alive while paying its creditors over time. Individual debtors and business owners may seek relief under a Chapter 11, but for our purposes we're going to discuss Chapter 11 as it pertains to businesses.

How Chapter 11 Bankruptcy Works

Typically, Chapter 11 is used to reorganize a struggling business. Such a business may be a sole proprietorship, a corporation, or a partnership.

Corporations are considered to be separate and apart from their owners or stockholders. When a Chapter 11 is filed, it does not risk the personal assets of the stockholders, with the exception of the value of the company stock.

On the other hand, a sole proprietorship (where the owner is the debtor) does not have an identity that is separate from the owner. To further elaborate, when a bankruptcy case involves a sole proprietorship, it includes the personal and business assets of the owner-debtors.

Like a corporation, partnerships are separate and apart from their partners. However, in a partnership case where the partnership is the debtor, the partners' personal assets may be used to pay off creditors, or the partners may be forced into bankruptcy.

Under Section 1107 of the Bankruptcy Code, the debtor in possession acts as the fiduciary and the Chapter 11 trustee. Meaning, the debtor is required to perform all of the duties ordinarily entrusted to the trustee in other chapters, including the right to:

• Hire attorneys
• Employ accountants
• Hire appraisers and auctioneers
• File tax returns and reports

Are you considering filing Chapter 11?

If your business is having difficulty remaining afloat, it may be time to consider your bankruptcy options. To get started, contact a bankruptcy lawyer from our directory today!