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Why do so many businesses file for Chapter 11 bankruptcy?

Readers of this Pennsylvania bankruptcy law blog may be interested to know that there are a variety of different forms of bankruptcy protections. Contrary to what some may believe, bankruptcy is not a single process that applies to individuals and businesses alike; depending on the goals of the party filing for bankruptcy, the type of bankruptcy pursued can be very different.

Businesses and individuals can file for Chapter 7 bankruptcy. Under this process the filing party effectively sells off or liquidates all of its assets in order to satisfy its outstanding debts. In a business context, this can be a good process to choose if the entity desires to close its doors, eliminate its capital and cease operations. However, businesses that wish to keep their doors open are not well served by this method of bankruptcy.

Unincorporated businesses called "sole proprietorships" can effectively pursue Chapter 13 bankruptcy, which generally involves the debtor business creating a repayment plan that satisfies its debts through the allocation of the debtor's disposable income to the repayment efforts. Unfortunately, not all businesses have disposable income, and for this reason not all can pursue this form of bankruptcy and its protections.

Chapter 11 bankruptcy, however, allows a debtor business to remain in possession of its property (unlike Chapter 7, which requires a sale), to keep its doors open and to formulate a restructuring or reorganization plan that will allow it to become profitable and repay its debts. Reorganization plans must be approved before they can be implemented, and interested readers are encouraged to speak with their bankruptcy attorneys to learn more about this option.

Bankruptcy in its different forms can impose different requirements upon a filing business. As this post only generally touches on three different forms of bankruptcy, readers should speak with their own legal representatives about which form of bankruptcy may best serve their business's interests.

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