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How does Chapter 11 bankruptcy work?

A Chapter 11 bankruptcy may provide debt relief to large corporations, sole proprietorships and even individual consumers.

Connecticut residents may well be familiar with reports about very large corporations filing for Chapter 11 bankruptcies. But, not everyone may actually know what a Chapter 11 bankruptcy is and how it works. Not all bankruptcies are the same and understanding Chapter 11 is important for anyone who may be in need of serious debt relief.

Consumer and business bankruptcy

One of the first things that anyone should know about a Chapter 11 bankruptcy is that it is not just for businesses. The Balance explains that individual consumers as well as companies can file for a Chapter 11 bankruptcy plan.

For individuals, there are specific financial requirements that must be met in order to qualify for relief under a Chapter 11 plan. If a consumer does not meet these requirements, they may be eligible for a Chapter 7 or a Chapter 13 plan in some situations.

The United States Courts also adds that a consumer Chapter 11 bankruptcy may be filed jointly by a married couple or individually by a single person or by one spouse in a marriage.

If a company files for Chapter 11 relief, the personal assets of an owner may be included if the business operates as a sole proprietorship. Corporate Chapter 11 bankruptcies would only focus on the business finances.

The basic process

At the outset of a Chapter 11 bankruptcy, debtors would provide a plethora of financial details to the court along with a disclosure statement. This might include an outline of all income and expenses, debts and assets and active contracts. Consumer Chapter 11 plans may require additional details.

The disclosure statement provides a recommendation of how the debt may be reorganized as a Chapter 11 is a form of structured repayment. Most creditors receive less than the full amount they are owed which is part of how debtors may be helped by this bankruptcy option. Many creditors find it preferable to receive a lower amount than to receive nothing at all.

If the court approves the plan, a third party is put in charge of receiving regular payments and distributing money to the creditors per the plan.

Choosing the right type of bankruptcy plan

Connecticut debtors whether as individual consumers or as business owners should always consult with an experienced bankruptcy attorney before deciding to file for Chapter 11. Talking to a lawyer will allow people to learn more about the process and the outcomes relative to their specific situations.