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Filing for Chapter 11 bankruptcy stops collection activities

Business was tough enough before the pandemic. Now, many businesses are facing a cascade of troubles. Vendors and suppliers are slow or unable to fulfill their contracts. Your rental properties aren’t paying. Expenses haven’t gone down, but income has dropped off. And now you’re being contacted by debt collectors. What can you do?

It may be a good time to consider reorganizing your business through Chapter 11 bankruptcy. Filing for Chapter 11 allows you to stabilize your situation, shed some debts and work out arrangements to pay the rest of your debt on a schedule you can afford. Meanwhile, you are considered a “debtor in possession,” meaning that you maintain possession and control of your business assets until the reorganization is confirmed.

That’s right. Chapter 11 bankruptcy allows you to keep running your business and maintain control of your assets while working toward a way to resolve your outstanding debt.

Moreover, the debt relief can begin right away. The moment you file a bankruptcy petition, an “automatic stay” goes into effect. This stays, or halts, all collection activities by your existing creditors. The automatic stay can prevent:

  • Collection calls and contacts
  • Executions of court judgments
  • Foreclosures
  • Repossessions
  • The continuation of existing court cases

The automatic stay gives you breathing space in which to conduct negotiations. There are ultimately some exceptions where creditors can apply for relief from the automatic stay, but these take some time. So, creditor harassment stops while you negotiate, generally with a select committee of your creditors and a bankruptcy trustee.

I can’t pay off all of my company’s debts. Can I still file for Chapter 11?

Yes. In many cases, you will shed some debt obligations over the course of your Chapter 11 plan. These will generally be debts owed to common creditors with no collateral (also known commonly as “unsecured creditors”). If you cannot work out a repayment plan that will allow your business to survive, you can convert your Chapter 11 filing to a Chapter 7 “liquidation” proceeding.

What should I do now?

If you are considering business bankruptcy, you should talk to an experienced business attorney. Your lawyer can help you determine if you should stop paying some debts and develop a plan that could save your business.