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Explaining Chapter 11 Bankruptcy

Bankruptcy for Business Reorganization

Chapter 11 is one of the sections of the United States Bankruptcy Code, that allows entities in debt to reorganize under a specific set of laws.  Most Chapter 11 bankruptcy protection cases are filed by businesses, though the process can be filed by an individual as well.  Chapter 11 is similar to Chapter 13, which is the section of Bankruptcy Code used mostly by individuals who seek to reorganize their finances.

When a Business is Financially Struggling

Generally, when a business entity is not able to pay off all their creditors, they may consider filing for bankruptcy protection.  The two most common choices of bankruptcy protection that businesses file are Chapter 7 and Chapter 11.

Chapter 7 dictates liquidation of the company’s assets.  Usually the business stops operating before or during the bankruptcy proceedings.

In contrast, when filing for Chapter 11 bankruptcy protection, the company can continue to operate and exist during and after the bankruptcy process.

Financial Plans After the Filing

After filing for Chapter 11 bankruptcy protection, a business has 120 days to create their own plan for reorganization.  If several plans are presented to the bankruptcy court, the creditors can vote on the plan which they feel is in their best interest.

If all the creditors agree to one of the plans put forward, and the bankruptcy court approves of the plan, the plan is implemented.

If the creditors cannot agree on the plan, or if the bankruptcy court doesn’t approve of it, the court could dismiss the Chapter 11 filing, or convert the case to a Chapter 7 bankruptcy protection case, in which case the assets of the business would be liquidated.

Creditors that have collateral in the debtor’s assets, or secured creditors, have priority over ones that don’t.

Any business that files for Chapter 11 bankruptcy protection has 60 days to hand in an official statement that lists all of the company’s liabilities and assets.

Benefits of Reorganization

There are several benefits afforded to a company when they file for Chapter 11 bankruptcy protection.  The idea behind Chapter 11 is to facilitate the business being able to reorganize its finances and achieve a more stable financial position.

A debtor, after filing for Chapter 11 bankruptcy protection, is able to receive loans with better terms.  This is due to the fact that any potential new creditor is the first priority in receiving the bankrupt business’s profits to pay up the loans.

Additionally, any lawsuit or litigation that has been pending against the company is put on hold, and no action can be taken against the company without authorization from a bankruptcy court.  This is referred to as an automatic stay.

If despite the filing for Chapter 11 bankruptcy protection, the company is still unable to repay its debts, the company is termed to have become insolvent.  At that point the creditors of the bankrupt business take over as the owners of the reorganized entity.