Bankruptcy Fix Up

What Is Chapter 11 Bankruptcy

December 16th, 2007 Subscribe To Our Feed

Chapter 11 bankruptcy is associated with corporate debt. Businesses or corporations that are in financial trouble can file for chapter 11. Upon completion of the proceedings the court will order creditors to stop pursuing monies that were extended to the organization as credit.

Reasons For Filing

Most companies file for chapter 11 bankruptcy because of financial mismanagement, a downturn in their business or a downturn in the economy as a whole. In these cases the companies debts are in such a state that it becomes impossible to repay the creditors. When this happens the court will appoint a trustee to oversee the management of assets and outstanding debts. The trustee is trusted with the task of repaying creditors in a timely and efficient manner. It/they will work with the company to pay off the debts through asset liquidation or a repayment time line that is agreed by both parties

The Chapter 11 Bankruptcy Process

A business or corporation must go through the same process as an individual when filing for bankruptcy. Whereas an individual may file for chapter 7 or 13, a corporation will go for chapter 11. However, the main difference in the process is that an individual voluntarily files for bankruptcy. In the case of businesses, the creditors of the business can force it to go into chapter 11 bankruptcy. This benefits the creditors because they have a better chance of getting some or all of the outstanding money that is owed to them. The court, through a trustee will get involved in the management of the businesses finances and will work out a plan to pay off creditors. This can also be beneficial to the business in trouble as they can continue to trade, which gives them a chance to generate revenue and pay off the debts.

What Happens During A Chapter 11 Bankruptcy

If a business files for Chapter 11 bankruptcy, the shareholders receive nothing once the bankruptcy is completed. As such, they lose all of their rights to the company and its assets because the trustees take control of the company. It will try to put in place a way to retrieve the monetary losses that have been incurred. It will also try to save jobs and keep the business running and making a profit.

While it makes a lot of sense for a failing business to file for Chapter 11 bankruptcy, there are critics who feel it hurts those who are involved with the company. Others feel that it gives a company an unfair advantage, as it can continue to operate even though it is in financial difficulties. This puts the company at an advantage over its competitors since it has more money to put into developing new products, acquiring new customers and generally getting it’s house in order. Another criticism of the law is that it does not root out bad financial managers and perpetuates the practice of financial mismanagement. The same criticism is leveled at corporations applying for bankruptcy protection too.