What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a form of corporate financial reorganization in which a company's assets gets sold off to remunerate past due creditors. In some cases, Chapter 11 bankruptcy allows companies to continue to function. The theory here is that businesses which are allowed to move forward will generate revenue, protect jobs, and otherwise heal creditor wounds. Scraping and selling businesses for their parts, on the other hand, may lead to less than optimal utilization of company resources. Chapter 11 bankruptcy filings may be “strategic”. In other words, management may wish to reorganize for political reasons, not simply for the sake of balancing books.

Occasionally, individuals may be able to file for Chapter 11 bankruptcy. However, the vast majority of consumer filers end up applying for bankruptcy under the Chapter 7 or Chapter 13 Titles. There is also a Chapter 15 Title bankruptcy, which handles international bankruptcy disputes, as well as a Chapter 12 Title, which deals with farm and fishery bankruptcies.

Some legal scholars complain that Chapter 11 bankruptcy is too lax in the United States. After all, upper management in Chapter 11 bankruptcy companies may continue to run operations post filing. In Europe, on the other hand, top management teams are often fired or replaced post bankruptcy.

There are certain large publicly vested entities which are legally not allowed to file for Chapter 11 bankruptcy. Insurance companies, utilities, and certain conglomerates may not have the privilege of filing and may thus have to reallocate or redistribute funds to creditors under other applicable laws. In large-scale bankruptcy cases, the federal government can get involved. That said, the Constitution and legal precedent both make it abundantly clear that Chapter 11 bankruptcy is by and large situated under the purview of state law.

Much of Chapter 11 bankruptcy case law is devoted to the finding what constitutes asset exemptions under the law. In cases in which parent companies and/or partnerships are involved, assets may be shielded by selling them off or otherwise hiding them within the financial infrastructures of sympathetic firms. It's even legally possible, under certain situations, to offshore assets to shield them from creditors. Despite the abundance of case law designed to establish precedent for Chapter 11 bankruptcy situations, the emergence of "globalized business" has added a new wrinkle to the ongoing debate over how failing businesses should repay creditors.