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Why Choose Chapter 11 Bankruptcy?

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A non-farm business facing financial difficulty only has a couple of options under the U.S. Bankruptcy Code and generally chooses bankruptcy Chapter 11. The other choice is a Chapter 7 bankruptcy, but that involves liquidating the business entirely. Many business owners choose Chapter 11 bankruptcy, instead, for the chance to keep the business in operation.

Stay in Business with Bankruptcy Chapter 11

The popularity of Chapter 11 bankruptcy relates directly to the ability of a company to continue to operate and to have a chance to emerge from the Chapter 11 reorganization as an ongoing entity.

A company suffering extreme financial hardship, perhaps unable to make its debt payments or payments to creditors, will immediately be granted an automatic stay after filing for Chapter 11 bankruptcy protection. This allows the company some relief from business pressures and a little time to come up with a restructuring plan. The automatic stay under bankruptcy Chapter 11 will stop any foreclosure actions and provide some temporary protection for the business from any lawsuits, potential tax issues and angry creditors.

Debtors Retains Control in Chapter 11 Bankruptcy

The other main reason bankruptcy Chapter 11 is chosen so often is that, unlike Chapter 13 reorganization for individuals, the debtor retains a large degree of control. The debtor is referred to as debtor-in-possession after the bankruptcy filing, but actually works with a creditor’s committee – usually the largest unsecured creditors – to come up with both a disclosure statement and a reorganization plan. The disclosure statement is more of a summary of the company’s current financial condition.

The exception to the debtor’s role in a Chapter 11 bankruptcy case comes in situations where creditors can prove fraud or negligence. In that situation, the debt is replaced by a bankruptcy trustee.

The authority of a debtor-in-possession in bankruptcy Chapter 11 cases is similar to the role of a bankruptcy trustee in individual cases. For example, in cases involving large companies, the debtor-in-possession can void certain contracts or leases as part of a reorganization plan. It’s not unusual for a retail store in bankruptcy to close some outlets, terminate some employees or renegotiate contracts with suppliers.

However, the power is limited and the creditor’s committee, for the most part, must agree with the reorganization plan. There is, however, an option in Chapter 11 Bankruptcy rules that allows the court to “cram down” a plan if the bankruptcy court believes it is reasonable, despite objections from creditors.

While most bankruptcy experts agree that bankruptcy Chapter 11 is the most flexible option available, it is also the most expensive and one of the least successful bankruptcy chapters. The filing fee alone is three times an individual bankruptcy case, and fees paid to the bankruptcy court or trustee can often be very expensive, particularly for large companies. According to 2008 statistics, only about 10 percent of Chapter 11 plans for bankruptcy completed successfully.

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