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Options for corporate bankruptcy

Pennsylvania businesses considering filing for business bankruptcy often have concerns regarding what will happen to the business if they choose to file for bankruptcy. The outcome of the bankruptcy will depend on the chapter under which the business files its bankruptcy.

When a business files under Chapter 7, the business will undergo a complete liquidation. Chapter 7 bankruptcies will result the sale of the business's assets in order to satisfy a portion of the amounts owed to creditors. Secured creditors that have liens against business property have collateral against the owed amount and are paid first. After paying the secured creditors, the trustee will then turn to the remaining creditors. Those who are bondholders have a greater chance of recovery than stockholders do.

Chapter 11 bankruptcy is chosen when the business wishes to reorganize their debt and continue doing business. In such a proceeding, the business will need to propose a repayment plan that makes payments towards the owed amount to the trustee over a set time. The plan must be approved, and the trustee and the court will oversee the business's operation; all significant decisions will require the bankruptcy court's approval. Failing to comply with the terms of a Chapter 11 bankruptcy can result in the case's dismissal or in a conversion of the bankruptcy to a liquidation proceeding.

Businesses sometimes find themselves facing unmanageable debt and need to seek debt relief. Because of the different requirements for each type of bankruptcy, a business owner who is seeking such protections might benefit from discussing the situation with an attorney who is familiar with commercial bankruptcies.

Source: U.S. Securities and Exchange Commission, "Corporate Bankruptcy", November 30, 2014

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