If you are a business owner who is struggling financially, you will be able to file for Chapter 11 bankruptcy if you believe that you can reorganize your business to be able to save it. However, there are some circumstances where a Chapter 11 bankruptcy is converted into a Chapter 7 bankruptcy by the courts.
How Chapter 11 Works
For personal bankruptcy, the party filing for bankruptcy has their debts managed by a trustee. However, if you are filing for Chapter 11 bankruptcy, you will become a "debtor-in-possession." However, if you later decide that you will not be able to pay off your debts, you may be able to have your Chapter 11 converted into a Chapter 7. Before making any huge decisions, you will want to consult with a bankruptcy attorney about this.
What Happens After a Conversion
Once you have converted your bankruptcy to Chapter 7, a trustee will take control of your debts and the paying off the debts. They will take each of your business assets and liquidate them. These assets will then be distributed in a manner that is fair for all the creditors.
How the Courts Will Respond
The courts will try to determine the likelihood that the estate will continue to shrink. The courts will look at the cash flow and the depreciation of assets. The sooner that the assets are sold, the more that these assets can be used to pay down debts. Also, with a lack of cash flow, you may find it difficult to maintain your assets and this might further cause them to decrease in value.
In most cases, a creditor will not want you to file for Chapter 7 bankruptcy. However, there are some cases where you might be forced to convert to Chapter 7 because a creditor believes that this will improve their position. If you do not want to convert your bankruptcy, you should bring this up with your attorney.
The courts will sometimes forcibly convert your bankruptcy to Chapter 11 because they believe that you are simply reorganizing at the expense of your creditors and that you will not be able to make your business profitable. This will typically mean that you will be forced to close your business. Based on the financial information you are presenting to the court, your attorney will need to make a case for why you will still be able to save your business.