Chapter 11 or Chapter 7: Which is right for your business?

Risk is a part of business. You can take action to minimize risk, but there may still be unforeseen events that result in losses. The Bankruptcy Code takes into account risk and offers protections for debtors and creditors. At Shulman Bastian Friedman & Bui LLP, we help businesses choose the appropriate debt relief option, whether it's restructuring the business through Chapter 11, a liquidation under Chapter 7, an out of court workout, an assignment for the benefit of creditors, or a formal dissolution.

Let's consider when Chapter 11 might be the better route to take. Generally, when people hear about a Chapter 11 bankruptcy, a large, widely known corporation has encountered financial difficulties and plans to restructure finances while continuing operations. However, the majority of companies that file for Chapter 11 are not widely known corporations. Small, closely held corporations have the same right to re-organize as do large publicly traded ones. Chapter 11 may be appropriate for a limited liability company, partnership or corporation that intends to continue operating while restructuring the business. An individual with a high net worth could also file for Chapter 11 reorganization. The Chapter 11 process is complex and requires careful planning that accounts for the short and long terms.

Through Chapter 11, a company may sell a portion of its assets to pay back creditors or downsize. Many businesses that complete the Chapter 11 process are able to return to profitability, but it is important to know whether your business can handle the expense and time required to create a workable Chapter 11 plan.

For businesses that are not able to restructure assets and continue operations, other options are available and should be thoroughly explored.

If you want to learn more about bankruptcy options for California businesses, then here is a good place to start.

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