Chapter 11 filings no longer have the stigma of bankruptcy associated with them. Once upon a time all kinds of bankruptcies were looked down upon by corporations, communities and people. However, with so many firms filing for Chapter 11 bankruptcy, America has become aware of what the section implies. Recently when the AMR Corporation, American Airlines parent company, filed for Chapter 11 bankruptcy, no eyebrows were raised. It was seen as just another of those Chapter 11 filings, which are now widely-known as “business reorganization.”
However, if the bankruptcy judge suspects any bad faith in a Chapter 11 filing, he may convert it to a Chapter 7 bankruptcy. Now, Chapter 7 bankruptcy does have some amount of stigma attached to it. Chapter 7 bankruptcy means liquidation. Firms that do not see any future because of excessive debt and apathetic sales may want to shut down operations completely by filing for Chapter 7 bankruptcy. In Chapter 7 bankruptcy a case trustee is appointed by the bankruptcy court. The case trustee determines the assets that can be sold to repay the firm’s debts. Accordingly, a list is made and assets are sold and the receipts are used to pay off the creditors. After the Chapter 7 bankruptcy process is complete, the firm ceases to exist.
Chapter 11 filings permit firms (corporates, partnerships, sole proprietorships) to reorganize their business. A firm typically opts to seek protection under Chapter 11 of bankruptcy laws when it has a viable and profitable product line but is heavily bogged down by debt. Chapter 11 helps get the firm more time to repay its debts and it is very commonly used by American businesses that want to get back into shape again.
Chapter 11 bankruptcy filings can be voluntary or involuntary. Either the firm or its creditors can file for bankruptcy under Chapter 7 or Chapter 11. Under Chapter 11, the debtor has to file financial and other documents as required by the bankruptcy court. He must also file a reorganization plan that should be approved by a committee of creditors. The firm’s debts are classified and repaid In order of their priority – taxes, employee benefits, alimony, etc., are classified as priority debts and they must be repaid first. Next in line are the secured creditors followed by partially-secured creditors and then unsecured creditors.
After the reorganization plan is approved by the committee of creditors, the debtor firm must execute it to perfection. If it slips up or deviates, the Chapter 11 bankruptcy becomes void and the creditors are free to sue the firm. If the debtor executes the reorganization plan as stated and pays his creditors as stated in the plan, then a final decree is entered by the court after the plan is executed and the firm becomes debt-free.
This is how Chapter 11 filings work. If you are considering a business reorganization on the same lines, talk to a legal expert who’s reputed for handling Chapter 11 cases.
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