When it comes to claiming bankruptcy, there are many different types, or Chapters, to consider. If you are an individual looking to file a bankruptcy claim, then you would likely file under Chapter 7 or Chapter 13. However, if you are a business then you will need to choose between Chapters 7 and 11. Because we’ve already devoted much of our attention to Chapter 7 and Chapter 13 through other articles, the focus of this article will be on Chapter 11; otherwise known as “reorganization bankruptcy.” Click on the following link for a complete Chapter 7 bankruptcy definition.
So, how does Chapter 11 work? Chapter 11 Filings are meant for businesses (whether organized as corporations or sole proprietorships) that are looking to retain control of their business while gaining assistance through the bankruptcy process. Unlike a Chapter 7 case where the debtor must have their assets liquidated to pay back their creditors, Chapter 11 allows a business to retain their assets in exchange for oversight and jurisdiction by the court. This form of bankruptcy allows the business owner to restructure their business in a number of ways –
• The debtor can acquire loans on favorable terms by allowing the lending institution(s) first priority on future earnings of the business.
• Under some circumstances, the debtor may be allowed to reject and cancel contracts under the direction of the court.
• Debtors are protected from certain forms of litigation through an “automatic stay.” In other words, most litigation is placed on hold until it can be resolved in bankruptcy court.
Under the worst case scenario, a company’s debts exceed its assets, in which case the owners are left with absolutely nothing. In this situation the newly restructured company is handed over to the company’s creditors. The typical term for a Chapter 11 bankruptcy claim is a few months to several years, depending on the nature of the company and its finances. The term is also based on the bankruptcy plan, which is drafted or voted upon in conjunction with the company’s creditors.
Studies have indicated a 60% drop in Chapter 11 filings from 1991 to 2003. Analysts contend that the reason for the decline has to do with businesses turning to bankruptcy-like proceedings through their local states, rather than through conventional federal bankruptcy proceedings. Businesses cite efficiency, cost savings and privacy as reasons for handling their financial affairs at the state level. In fact, some states don’t even require that businesses file through court. While these types of proceedings are on the rise at the state level, it’s important to note that cases involving assets of $50 million or more are almost always handled at the federal level.
For more information on Chapter 11 filings, consider heading over to the United States Court website. As always, feel free to browse around our site for informative articles related to the personal bankruptcy process. We even feature a free bankruptcy evaluation to help you determine if filing bankruptcy is the right decision for you.