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Cash flow isn’t guaranteed with a chapter 11 bankruptcy

On Behalf of | Jun 29, 2023 | BANKRUPTCY LAW - Chapter 11

Business owners may struggle when it comes to their finances. If these complications persist long enough, they may need to file for Chapter 11 bankruptcy. There are many things to learn beforehand so you don’t get caught off guard.

Creditors will be kept from taking action

After you first file for Chapter 11 bankruptcy, an automatic stay will go into effect. This keeps nearly all types of creditors from being able to act against you for a short while. You will have some time to make a reorganization plan and not receive any communications or legal action from creditors during this period.

This stay will be in place until proceedings end but also will no longer be in effect if the court modifies it. Though this does prevent actions toward your business during reorganization, there is a downside. Creditors aren’t required to lend any more money to your business during this time, even if payments were scheduled. This can affect your cash flow, so it’s in your best interest to prepare for any changes that may come with less cash coming in.

Some creditors are treated differently

There are different categories of creditors under the bankruptcy law. Secured creditors are set up to receive at least the value of collateral in which they have a security interest. After the payment of debts to secured creditors, unsecured creditors will get a portion of what the business owes to them. Unsecured creditors are considered to be lower in priority when it comes to paying off your debts.

Chapter 11 bankruptcy can cause a great deal of stress for business owners. If you find that you need to reorganize your debt but want to keep your company running at the time, this may be the right option for you.