chapter 11 bankruptcy

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A company that is unable to pay its debts or creditors can file, or be forced by creditors to file, for bankruptcy under chapter 7 or chapter 11 of the Bankruptcy Code. Unlike chapter 7 bankruptcies in which assets are liquidated, chapter 11 is a reorganization. Chapter 11 is usually used by businesses.

Usually a business is considered more valuable than the sum of its parts. Since it's economically better to keep a company running than to sell off individual assets, a chapter 11 bankruptcy is used. In bankruptcy chapter 11, the company is reorganized and some debts are cancelled. This allows the company to try again to make a profit.

If a business is a corporation or partnership, it exists separately from its owners (the stockholders). In a corporation the personal assets of the owners are not at risk in bankruptcy aside from the value of their investment in the company. In a partnership, personal assets sometimes may be used to pay creditors or the partners may be forced to file for bankruptcy. In a chapter 11 case for a sole proprietorship (the owner is the debtor), on the other hand, both the business and personal assets of the owner are involved.

What happens in chapter 11 bankruptcy? If you need to file chapter 11, you will have the rights and powers of trustee. You will do all but the investigating functions and duties of a bankruptcy trustee. These duties include accounting for property, handling claims, and filing reports. Other duties include the right, with court approval, to hire accountants, attorneys, appraisers, or other professional people. After the bankruptcy confirmation, you will file reports, tax returns and the final accounting. The U.S. trustee will monitor your compliance with reporting requirements.

In a publicly held company (a company with stocks and/or bonds), the U.S. Trustee appoints one or more committees to represent the interests of the creditors and stockholders to work with the company and develop a reorganization plan. The plan has to be accepted by creditors, stock and bond holders, and be approved by the court. If the creditors and stock and bond holders reject the reorganization plan, the court can confirm the plan if it finds that it treats stockholders and creditors fairly.

The committees work with the company to create a plan that complies with the Bankruptcy Code. The company then files a reorganization plan with the court and prepares a disclosure statement. The Securities and Exchange Commission (SEC) review the disclosure statement if there is a publicly traded stock. Then the creditors (and sometimes stockholders) vote on the plan. The court confirms the plan and the company carries it out.

During the bankruptcy, dividends to stockholders are halted and bond holders stop receiving principal and interest payments. Under the bankruptcy reorganization, sometimes old stocks will be exchanged for new shares which may be worth less and/or few in number. Bondholders can receive new bonds, new stocks, or a combination of the two.

Individuals do not usually use chapter 11 to file for bankruptcy; but if you own a business, this is chapter to use. Chapter 11 is more complex and expensive than chapters 7 or 13. If you do need to file chapter 11, you should have a competent bankruptcy attorney.

Individuals do not usually use chapter 11 to file for bankruptcy; but if you own a business, this is chapter to use. Chapter 11 is more complex and expensive than chapters 7 or 13. If you do need to file chapter 11, you should have a competent bankruptcy attorney.

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chapter 11 bankruptcy