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Against Your Will

Drowning in debt? If so, you should know about a legal maneuver creditors can use to force bankruptcy.

This story appears in the January 2004 issue of Entrepreneur. Subscribe »

Last June, the house of representatives passed a bill to amend the section of the Bankruptcy Code that governs a legal maneuver you may not know about-involuntary bankruptcy. The Bankruptcy Code allows two forms of bankruptcy for businesses in desperate financial straits. In Chapter 7 straight bankruptcy, a business is usually liquidated, and the creditors divide up the assets. In Chapter 11 reorganization, the bankruptcy court declares a moratorium on debt payments while the business realigns its financial obligations. The goal is for the business to work out a way to pay back as much as possible while still remaining alive.

Both forms are drastic measures. Chapter 11 reorganization isn't much easier to swallow than Chapter 7 liquidation, and the majority of businesses that go into it never successfully reemerge. Reorganization involves submitting your plan and every business decision to the scrutiny of a committee of creditors that has the right to second-guess your proposals. That's why businesses try every kind of negotiation and deal-making they can to stave off declaring bankruptcy.

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