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How does Chapter 11 reorganization work for a small business?

Small businesses owners in Massachusetts have to live with a certain amount of economic risk. But, sometimes economic changes that are beyond the control of the best managers can leave a business with more debt than it can manage. When this occurs, a business reorganization under Chapter 11 of the Bankruptcy Code may provide the only chance for survival.

When a business files for protection under Chapter 11, the court enters an automatic stay that freezes all collection activity by creditors. The business must then prepare a reorganization plan. This plan generally involves renegotiating contracts and leases and getting creditors to agree to take less than the full amount they are owed. The creditors are motivated to compromise their claims because they generally understand they would get even less - or nothing at all - if the business is forced to liquidate.

The creditors with the highest priority in a Chapter 11 reorganization include employees who are owed wages, and government entities that are owed back taxes. Secured creditors come next and generally get better terms than unsecured creditors, who are grouped together in a single class. All creditors must vote on the plan, which is then submitted to the court for approval.

Small businesses are given more time than large corporations to file their plans and negotiate with creditors. A small business will also be subject to greater oversight from the court, which will appoint a U.S. trustee to manage the case on a day-to-day basis.

If the reorganization plan is approved, certain debts will be discharged. The business will then begin repaying creditors according to the plan. While all this is going on, the business is allowed to continue operating without interruption.

Source:, "Chapter 11 Bankruptcy," accessed Jan. 1, 2017

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