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What are the respective roles of creditors and debtors in Chapter 11 bankruptcy?

Whether you're a business owner with heavy debt, a creditor seeking to collect, or a bankruptcy trustee, it is important to know how the Chapter 11 bankruptcy process works and how the case will be monitored by the court.

Chapter 11 bankruptcy typically involves a reorganization of the business, with the goal of returning to profitability. The petition for Chapter 11 can be filed by the debtor or the creditors. When the creditor files, the bankruptcy is referred to as an involuntary bankruptcy. In any case, an automatic stay is placed on creditor actions once the bankruptcy petition is filed.

A business going through Chapter 11 can maintain operations while developing plans for reorganization and repayment. The bankruptcy court monitors this planning by looking at monthly reports provided by the debtor. The debtor and the creditors may also begin negotiating feasible repayment options, though typically the repayments to creditors are significantly lower than the amount of the original debt.

Throughout the Chapter 11 process, the debtor and the creditor may review each other's claims, and if there is dispute, an objection may be filed with the court.

If the reorganization plan is confirmed by the court, then the debtor must pay creditors in accordance with the plan, and other debts may be discharged.

Chapter 11 isn't for every business with heavy debt, and creditors and debtors alike should consult with a bankruptcy attorney about the most cost-effective way of resolving the debt. Depending on the circumstances, an out-of-court workout, such as restructuring the debt and negotiating a settlement, may be an option.

For more on the duties of trustees in a bankruptcy case, please see our previous post, "Steps a trustee can take to protect a bankrupt estate from fraud."

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