Chapter 11 Bankruptcy

      Federal bankruptcy law has provisions for business that can't cover their debts, Chapter 11 bankruptcy and, if you consider farming a business, Chapter 12 bankruptcy.  Chapter 12 bankruptcy applies to farmers and allows them to pay off their debts with future crop earnings.  Chapter 11 bankruptcy is the most common form of bankruptcy filing for businesses, even though they can file under Chapter 7 bankruptcy or Chapter 13 bankruptcy.   It offers a debt ridden company a chance to restructure and reschedule their debt while operating under protection from creditors and supervision of court.  It gives the company a chance to recover from its financial situation.  Individuals could do a Chapter 11 bankruptcy filing but it doesn't make much sense. Chapter 7  bankruptcy and  Chapter 13 bankruptcy are more appropriate for most individuals.

Chapter 11 Bankruptcy Filing

     Since many business have stockholders, when it files for Chapter 11 bankruptcy  protection, the U.S. Department of Justice appoints trustees or committees that represent the interests of the creditors and stockholders.  The debt ridden company formulates a plan of reorganization, or what it plans to do and how to recover.  The plan must be approved by the creditors and the stockholders.  The reorganization plan must also be approved by the Bankruptcy Court, which can override the creditors and stockholders.  It is in the best interests of the creditors to work with the financially ailing company because the creditors future income is dependent on the company's financial health.  Liquidation would mean the end of a stream of revenue for the creditors so they are usually open to renegotiating the outstanding debt and to continue supplying the business during the period of protection. Stockholders, as owners of the company, are lowest on the priority list for getting paid with secured creditors and non-secured creditors ahead of them. The company's stock may or may not continue to trade.  It has to keep filing reports with the SEC, including disclosure reports on the reorganization plan and its progress.

Chapter 11 Bankruptcy Reorganization

     Reorganization and operation under Chapter 11 bankruptcy require a lot of resources and effort on the part of the company management.  If the reorganization plan doesn't work, then the company can liquidate under Chapter 7 bankruptcy.  In this case, legal and administrative fees are paid ahead of the creditors.  It should be kept in mind that Chapter 11 bankruptcy and reorganization compensate for obsolete products and a faltering economic market.

      Chapter 11 bankruptcy and reorganization aren't the appropriate answer for all kinds of businesses.  For small businesses without a lot of capital and assets, it usually doesn't pay to reorganize.  It is usually simpler to file under Chapter 7 bankruptcy and then start over again under a new name.   It pays to consult a bankruptcy lawyer to ascertain the legal ramifications before choosing this route.

       Reorganization and protection under Chapter 11 bankruptcy has allowed many of our big corporations, like Chrysler and several airlines, to survive.  Without Chapter 11 bankruptcy and a good plan, they would have liquidated and gone out of business. Many a good business has been saved by chapter 11 bankruptcy.