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What Is Chapter 11 Bankruptcy?

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Chapter 11 bankruptcy is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans. The theory here is that otherwise viable businesses that are allowed to continue to operate will generate revenue, protect jobs, and be able to pay off creditors over time. Selling off the assets of the company to pay debts is a possibility, but it may not satisfy all of the indebtedness, and could force a business to close its doors. In many cases, a reorganization which allows for a repayment plan that everyone agrees to makes more sense. Chapter 11 bankruptcy filings may also be “strategic”. In other words, management may wish to reorganize for political reasons, not simply for the sake of balancing books.

A business filing a Chapter 11 bankruptcy may be a corporation, sole proprietorship, or partnership. Even though the owners of a corporation are its stockholders, the corporation is a separate entity so when a corporation is the debtor in a Chapter 11 bankruptcy, the personal assets of the stockholders are not at risk. Of course if the value of their stock declines as a result of the bankruptcy, then the stockholders’ investment is affected. A bankruptcy case involving a sole proprietorship, however, includes both the business and personal assets of the owners. And in a partnership bankruptcy case, the partners’ personal assets may, in some cases, be used to pay creditors or the partners may be forced to file for personal bankruptcy protection.

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 after 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 primarily under the purview of state law and each state has its own requirements and interpretations.

Much of Chapter 11 bankruptcy case law is devoted to determining 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 move assets offshore 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.

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