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Common Concerns & Questions About Bankruptcy

What is the Chapter 11 automatic stay?

| Jul 27, 2017 | Chapter 11 |

Sometimes even the best of businesses in Texas can fall on hard times. Whether it is a downturn in the economy, an increase in competition or an unexpected loss of sales, a business may find itself floundering in a sea of debt. For some businesses, the best way out of this debt is through filing for Chapter 11 bankruptcy, also known as a reorganization bankruptcy. This can especially be useful, as filing for Chapter 11 bankruptcy can put an automatic stay on creditor actions.

An automatic stay gives the debtor time in which all collection efforts, repossessions and the foreclosure processes are put on hold. In general, creditors cannot proceed on any of these actions, so long as they took place before the business filed for bankruptcy. This gives the business a “breathing spell” in which it can try to negotiate a way with its creditors to reach a resolution regarding their debts.

That being said, there are exceptions to the automatic stay. Depending on the situation, a secured creditor can seek a court order to lift the automatic stay. This might be the case, for example, if the business has no equity in the assets at issue and these assets are not needed to reorganize the business. If the automatic stay is lifted, the creditor is allowed to pursue foreclosure activities, sell the assets and then use the proceeds from the sale to go toward the debt the business owes to the creditor.

Nevertheless, the automatic stay is still a big benefit of filing for Chapter 11 bankruptcy. It gives the business time to try to negotiate a resolution with its creditors, and if this isn’t possible, the time needed to develop a reorganization plan that will allow it to both pay back its debts. Some businesses filing for Chapter 11 bankruptcy may even find that they can keep their businesses operational. Business owners interested in learning more about the Chapter 11 automatic stay can consult with their attorneys for more information.