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Chapter 11 bankruptcy is not the end for small businesses

When a big national or international business files for Chapter 11 bankruptcy, it usually makes headlines. However, most of the time, the company stays in business during and after bankruptcy.

The same is true for many smaller businesses on Long Island. Chapter 11 bankruptcy is also known as reorganization bankruptcy. It is a tool for business owners to negotiate settlements with creditors and come up with a plan for future profitability. Chapter 11 bankruptcy is not the end of a business; it’s the first step toward a new beginning.

J.C. Penney focused on the ‘long term’

For example, retail chain J.C. Penney recently announced that it was filing for Chapter 11 bankruptcy. But the company is not expecting to go out of business, despite challenges like a huge debt burden and a drop in sales due to the COVID-19 pandemic and resulting lockdown orders in New York and nationwide. In a statement, the retailer said bankruptcy would “better position J.C. Penney for the long term.”

Chapter 11 bankruptcy is available for small business owners

Once a business files for Chapter 11, they begin negotiating with creditors and the other parties to contracts. Usually, the business is able to settle their debts for less than they originally owed, and negotiate new agreements with vendors, landlords and other parties. The business also drafts a reorganization plan to submit to the bankruptcy judge. During this time, all collection actions against the company must cease, and the business may continue to operate and bring in profits.

If the judge approves the business’ reorganization plan, many of the company’s debts will be discharged, and most of the rest will be greatly reduced. One difference between Chapter 11 for small businesses versus large corporations is that the court will more closely monitor a small business’ profitability, and will appoint a trustee to the case.

Know your options with an attorney’s help

If your small business is struggling due to debt, Chapter 11 bankruptcy may be an option. Discuss Chapter 11 and other ways of helping your company get out of debt with an experienced bankruptcy lawyer.

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