The Essentials of Chapter 11 Bankruptcy

Bankruptcy is a legal process that helps businesses and consumers repay or eliminate debts under the protection of a federal bankruptcy court. There are two types of bankruptcy: reorganization and liquidation.

In a chapter 7 or liquidation bankruptcy, a business or consumer petitions the court to discharge debt and, in return, the consumer’s or business’ assets are sold and the money is used to repay creditors. In chapter 11, or reorganization bankruptcy, the consumer files a plan with the court detailing how the debt will be repaid. Some debts must be fully paid, while others require little or no repayment.

Differences Between Chapter 11 and Other Bankruptcy Types
Chapter 11 bankruptcy is a re-organizational bankruptcy, similar to chapter 13. Partnerships, corporations and businesses can obtain chapter 11 bankruptcy protection, and there are no debt limits. Chapter 7 is commonly used by individuals, but companies can file if they intend to cease operations and close the doors forever.

When Businesses File for Chapter 11
If a company files for chapter 11 bankruptcy, it will try to reorganize itself, and under its laws, the re-organizational plan must be affirmed by creditors. The business may continue to operate, but all significant decisions must be approved by the bankruptcy court.

Developing a Plan for Reorganization
Companies must take certain steps in reorganizing themselves, which include:

  • Developing a plan with creditor and stockholder committees
  • Preparing disclosure statements and reorganization plans and filing them with the court
  • Review of the statement by the SEC (Securities and Exchange Commission)
  • Creditors vote on reorganization plans
  • Courts confirm the plan
  • The company implements the plan

Disposition of Company Stocks
Corporate stock can be traded even during chapter 11 bankruptcy. Even if the company is no longer listed with stock exchanges, shares can still be sold. When or if the company emerges from bankruptcy, there may be old and new common stock; if old stocks are traded, their ticker symbols will have five letters that end in “Q”, which indicates the bankruptcy. New stocks do not have such a designation.

Hiring a Bankruptcy Attorney
Bankruptcies fall under federal law, and consulting an attorney may be beneficial for those who are unaware of the federal law’s complexities, so companies considering chapter 11 should ask an attorney with to assist them, as they can determine the best course to take.

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