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Understanding How Chapter 11 Bankruptcy Works

One of the first things that you need to know about chapter 11 bankruptcy is that it starts in more or less the same manner as any other kind of bankruptcy. In essence, you file a petition in court and a case number will be assigned to you. When this is done, an automatic stay will take in effect and there will be a schedule for the meeting of the creditors. This is how far chapter 11 bankruptcy goes in terms of similarities between other kinds of bankruptcies. As the person filing for this bankruptcy, you have to understand that you can use it for different situations. For instance, a chapter 11 can work as either a liquidation like chapter 7 or a reorganization like chapter 13.

In terms of function, you may file for chapter 11 bankruptcy to serve as a reorganization. As the one filing for this, you ger the opportunity to pay for your debts by reorganizing your financial affairs. This is done with the help of a reorganization.

The plan of reorganization that you will be getting with a chapter 11 bankruptcy will lay out how you will pay your debts moving forward. In short, you get another shot of paying back your creditors through renegotiations and restructuring.

From the US Bankruptcy Code requirements, all creditors should be classified accordingly. The first class of creditors is the secured creditors who have debts secured by a lien from the property. For unsecured debts, you have both priority and non-priority unsecured claims. From the repayment plan, the former means the unsecured debts are getting priority to receive money. The latter, on the other hand, will only be paid after all of the debts in priority are satisfied. Lastly, another set of creditors is the equity security holders, which apply to business owners.

When paying debts from various creditors, what goes first will be the secured creditors followed by the unsecured priority claims. Once these debts are all paid off, if there are non-priority unsecured creditors, then they will follow. In some cases, they will not be paid off. For equity security holders that have a claim on the company, on the other hand, they can get paid after or even before the other creditors. You may not also pay for them at all. Objections from creditors are welcome for the plan and assignment of class by the filer.

After filing a chapter 11 bankruptcy with the court, as the filer, you may immediately create your reorganization plan in the first 120 days. When it comes to small business owners with debts, you can go on with your plan as long as 180 days after you have filed for your petition. After these days have passed, the creditor may be the one to file for the reorganization plan if the debtor has not yet filed a plan or has one that creditors have approved.

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