Corporations and partnerships that operate a viable business but are buried under a mountain of debt can file for protection under Chapter 11 Business Bankruptcy. Such companies feel that a reorganization of their debts will help them stand on their feet once again. The creditors also have a higher chance of recovering a higher percentage of debt if the company does not completely close down. So, Chapter 11 represents a win-win situation for all – the business keeps going, the creditors may get all their money back, and the state keeps making its taxes.
Chapter 11 business bankruptcy involves reorganization of the company’s debts. The company makes a list of its debts that it seeks protection from, and it also files statements of assets, debts, cash flows, financial affairs, and others as required by the bankruptcy court. The company owner is considered as a “debtor in possession,” and he acts as the case trustee after he files a bankruptcy petition with the appropriate court. However, the court appoints its own case trustee if it comes across any instance of mismanagement or fraud on the part of the company owner or its management.
The business continues as it did before with some restrictions – for example, the company can buy and sell goods and conduct other operations in the normal course of business but it cannot indulge in irregular business activities like acquiring another company, or selling its assets. The petitioner files a reorganization plan which outlines how the company will repay its different classes of debts. The repayment period is also specified in the plan. This plan is then voted on by a committee of creditors.
After the committee of creditors votes on the reorganization plan, it goes to the bankruptcy court for approval. Once the reorganization plan is approved by the court, the debtor must comply with its terms. Any variations or violations can nullify the Chapter 11 bankruptcy for the business. The court can also convert the Chapter 11 bankruptcy into a Chapter 7 bankruptcy, which means curtains for the company because in a Chapter 7 bankruptcy the assets of the business are sold off to pay the debts, and the business ceases to exist after the bankruptcy proceedings are over.
If the company complies with the reorganization plan, then its debts get wiped off once the plan is fully executed, and it can start all over again. A Chapter 11 bankruptcy for businesses is a complicated affair and hence needs an experienced bankruptcy lawyer to guide a business through the rough and choppy bankruptcy waters.
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