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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.

By Jane Easter Bahls

Opinions expressed by Entrepreneur contributors are their own.

Last June, the house of representatives passed a bill to amendthe section of the Bankruptcy Code that governs a legal maneuveryou may not know about-involuntary bankruptcy. The Bankruptcy Codeallows two forms of bankruptcy for businesses in desperatefinancial straits. In Chapter 7 straight bankruptcy, a business isusually liquidated, and the creditors divide up the assets. InChapter 11 reorganization, the bankruptcy court declares amoratorium on debt payments while the business realigns itsfinancial obligations. The goal is for the business to work out away to pay back as much as possible while still remainingalive.

Both forms are drastic measures. Chapter 11 reorganizationisn't much easier to swallow than Chapter 7 liquidation, andthe majority of businesses that go into it never successfullyreemerge. Reorganization involves submitting your plan and everybusiness decision to the scrutiny of a committee of creditors thathas the right to second-guess your proposals. That's whybusinesses try every kind of negotiation and deal-making they canto stave off declaring bankruptcy.

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