Chapter 11 Bankruptcy Information

Finding succinct, understandable Chapter 11 bankruptcy information can be difficult. Because Chapter 11 bankruptcy is generally reserved for corporations and partnerships, lawyers often handle the bulk of the proceedings. An inherent problem with this is that sometimes those who are actually involved in the case are left in the dark. Fortunately, the basic principles of Chapter 11 bankruptcy aren’t all that difficult to ascertain when put into layman’s terms. Let’s take a look at a few of the important details regarding this legal proceeding.

1. Who can file for Chapter 11 bankruptcy? Under Federal law, this type of bankruptcy can be filed by anyone. All business types, from corporations to sole proprietorships, can file under Chapter 11. This does not, however, mean that everyone should file under Chapter 11, as it is quite expensive and complicated. Generally speaking, corporations are the entities best served by filing under this section of the bankruptcy code. Individuals, meanwhile, have other portions of the code (specifically Chapters 13 and 7) that apply to them.
2. What happens when a company files? The key factor that differentiates Chapter 11 bankruptcy from other types lies in its purpose: reorganization. In essence, it allows for the consolidation and reorganization of all an entity’s debt, sorting creditors by priority. By giving certain creditors rights to potential earnings, the filing company can renegotiate more favorable loan terms, meaning lower interest rates and longer time periods to pay their borrowings back. Businesses who file for Chapter 11 bankruptcy are generally given 180 days to come up with a plan for paying off the debts – which can last anywhere from a few months to several years. If a business is able to stay viable and pay off these debts, it is considered to have “emerged” from Chapter 11 bankruptcy successfully.
3. How is a company affected by Chapter 11 bankruptcy? As soon as the repayment plan is accepted by the court, it becomes binding. The plan must be fulfilled accordingly, under the enforcement of the court. On the plus side, companies that file are given what’s called an “automatic stay”, which gets creditors off their backs while they pay off debts according to the plan. This protects them from any other forms of litigation – namely creditors suing the organization for their money. The most important drawback to consider, especially with large companies, is that publicly traded stock is delisted from major exchanges. To put it simply, stock that the company has issued almost always becomes worthless. All things considered, it’s clear that a company must truly be in desperate circumstances to consider Chapter 11 bankruptcy.