Chapter 11 Bankruptcy Definitions – Simple To Understand

by Dori Tery on December 5, 2013

Chapter 11 Bankruptcy: Keep Your Creditors At Bay

In this rough economy, running a business can be very tough. This is particularly true if you have a lot of debt obligations weighing down your business. You simply might not have enough cash flow to cover the obligations, yet you want to keep the business going to serve your customers and avoid laying off employees. Chapter 11 bankruptcy proceedings were designed for just this type of situation.

Bankruptcy protection was designed for people and businesses who just can no longer afford their obligations to creditors. There are a variety of different types of bankruptcy. For a business, the two most common forms are chapter 7 and chapter 11 bankruptcies. These are named for the chapter in the U.S. bankruptcy code (Title 11) that the procedures are described by. Chapter 7 procedures result in a complete liquidation of the company. Undergoing this type of liquidation will likely bring your company to an abrupt end.

Chapter 11 bankruptcies are meant to try to keep the business in tact as a going concern. It represents a strategic restructuring of the business operation and the debts to make this possible. If a business owner has trouble making debt payments he can file a chapter 11 petition with a court which will then oversee the proceedings. The operator of the business in such a proceeding is referred to as the “debtor in possession.”

Often in a chapter 11 bankruptcy, the judge will help to mediate a restructuring of the debt between creditors and the business owner that will allow the business to continue operating. The proceeding gives several protections to the owner such as preventing new litigation against the company, and the judge has the option of allowing the business to cancel certain existing contracts if they are an impediment to the recovery of the business. The business owner can also be allowed get new loans with the new creditors getting first priority to the company’s earnings.

Creditors also have rights in these proceedings. If the debts are greater than the assets of the company, the owners’ and shareholders’ equity is often wiped away. The creditors then usually end up with the major equity interest in the ongoing company.

Usually a debtor will propose a restructuring plan which could involve selling of subsidiaries of the business, layoffs of employees, closure of unprofitable operations, and a modification of debt payment schedules. Debt holders can also propose a restructuring plan. The parties involved will have opportunities to vote and express their opinion about a given restructuring plan. Usually a judge will try to approve a plan that everyone agrees to through negotiation. However, if a minority creditor does not agree to the plan, the judge can approve a cramdown over their objections. Once approved, the new restructuring plan becomes binding on all parties.

While no one likes the idea of filing a bankruptcy petition, it can sometimes be the only solution to debt problems. Chapter 11 bankruptcy protection offers a viable way to keep a business going even if it cannot meet its creditor obligations.

chapter 11 bankruptcy

 

 

 

 

 

 

Watch the video – What is Chapter 11 Bankruptcy?

Watch the video – Types of Bankruptcy. Chapter 7 Bankruptcy? Chapter 11 Bankruptcy? or Chapter 9 Bankruptcy?

Comments on this entry are closed.

Previous post:

Next post: