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What is Chapter 11 Bankruptcy?

2017-06-17T09:49:23+00:00

The term 'Chapter 11 Bankruptcy' is included in the Corporate Finance edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

Chapter 11 Bankruptcy proves to be a specific type of bankruptcy. This kind has to do with the business assets, debts, and affairs being reorganized. The business reorganization filing was named for the Section 11 of the United States’ Bankruptcy Code. Corporations commonly file it that need some time to rearrange the terms of their debts and their business operations. It gives them a fresh start on repaying their debt obligations. Naturally the indebted company will have to stick to the terms of the reorganization plan. This proves to be the most highly complex type of bankruptcy filing possible. Companies have been advised to only entertain it once they have contemplated their other options and analyzed the repercussions of such a filing.

This Chapter 11 bankruptcy rarely makes the news unless it is a nationally known or famous corporation which is filing. Among the major corporations that have filed such a Chapter 11 bankruptcy are United Airlines, General Motors, K-Mart, and Lehman Brothers. The first three successfully emerged from it and became as great or stronger than they were before falling into hard times financially. In reality, the vast majority of these cases are unknown to the general public. As an example, in the year 2010, nearly 14,000 separate corporations filed for Chapter 11.

The point of this Chapter 11 Bankruptcy is to assist a corporation in restructuring both obligations and debts. The goal is not to close down the business. In fact it rarely leads to the corporation closing. Instead, corporations like K-mart, General Motors, and tens of thousands of others were able to survive and once again thrive thanks to the useful process of protection from creditors and reorganization of business debts.

It is typically LLCs Limited Liability Companies, partnerships, and corporations that make application for Chapter 11 Bankruptcy. There are cases where individuals who are positively saddled with debt and who are not able to be approved for a Chapter 13 or Chapter 7 filing can be qualified for Chapter 11 instead. The time table for successfully completing Chapter 11 bankruptcy ranges from several months to as long as two years.

Businesses that are in the middle of their Chapter 11 cases are encouraged to keep operating. The debtor in possession will typically run the business normally. Where there are cases that have gross incompetence, dishonest dealings, or even fraud involved, typically trustees come in to take over the business and its daily operations while the bankruptcy proceedings are ongoing.

Corporations in the midst of these filings will not be permitted to engage in specific decisions without first having to consult with the courts to proceed. They may not terminate or sign rental agreements, sell any assets beyond regular inventory, or expand existing business operations or alternatively cease them. The bankruptcy court retains full control regarding any hiring and paying of lawyers as well as signing contracts with either unions or vendors. Lastly, such indebted organizations and entities may not sign for a loan that will pay once the bankruptcy process finishes.

After the business or person files their chapter 11 bankruptcy, it gains the right to offer a first reorganization plan. Such plans often include renegotiating owed debts and reducing the company size in order to slash expenses. There are some scenarios where the plan will require every asset to be liquidated in order to pay off the creditors, as with Lehman Brothers.

When plans are fair and workable, courts will approve them. This moves the reorganization process ahead. For plans to be accepted, they also have to maintain the creditors’ best interests for the future repayment of debts owed to them. When the debtor can not or will not put forward a plan of their own for reorganization, then the creditors are invited to offer one in the indebted company or person’s place.

The term 'Chapter 11 Bankruptcy' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.