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How a Chapter 11 filing affects stockholders and partners

Since a Chapter 11 bankruptcy is a bankruptcy strategy that is often meant to apply to businesses, there are frequent concerns that arise. These involve the debtor in possession and what that means, how the filing will affect the assets, what will happen to shareholders and how a partner might be influenced. Understanding these numerous issues can make the process easier and help people who are considering this option decide if it is the best choice for them.

Businesses can come in different forms including a partnership, a sole proprietorship, or a corporation. The corporation will be in existence separately from those who own it -- the stockholders. If a bankruptcy is filed by a corporation with the corporation functioning as the debtor, the personal assets of those who hold stock in the company are not in danger because of the filing. The value of the stock they hold in the corporation are the only assets at risk. With a sole proprietorship, the owner is the debtor. This does not distinguish among the owners. Since that is the case, the business and personal assets of those who are part of a sole proprietorship will be at risk.

A partnership is similar to a corporation in that its partnership exists separately and apart from the partners. With the partnership as debtor, the partners' assets might be subject to pursuit by the creditors to recover payment. The partners might also have to seek bankruptcy in a situation such as this. According to the way Chapter 11 in structured, the debtor in possession will be the fiduciary. This means that the debtor in possession will do the same things that a bankruptcy trustee does and is bound to the duties inherent with that role. That includes filing tax returns and informational reports, dealing with claims, accounting for the property and more.

It is not unusual for a business to struggle and need to reorganize to get back on stronger ground. Part of that can be a Chapter 11 filing. There are many issues that can arise for those who are involved in a business that needs to pursue this type of filing. Those who are investors, partners or have a sole proprietorship in a business that is considering Chapter 11 need to have an understanding of the process. For help with a business bankruptcy, speaking to an experienced attorney is immensely valuable.

Source:, "The Chapter 11 Debtor in Possession," accessed on Dec. 8, 2015

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    He helped me thru my 1st bankruptcy and now the second. I had no idea what to expect , but they kept me informed and answered all my questions. Mr. Schneider is the most experienced and knowledgeable lawyer I have ever met. If you have to file call this attorney first!

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