While bankruptcy can provide relief and a fresh start from most debts, it is also considered the "debt option of last resort".
What is this thing called Chapter 11?
As opposed to Chapter 7 bankruptcy, which focuses on the liquidation of assets in order to pay off debt to creditors, Chapter 11 is used primarily by businesses as a restructuring tool. In most cases, Chapter 11 allows the company to remain viable and continue its day-to-day operations as it works to pay off its debts.
Companies who file for Chapter 11 retain control of their assets and business operations, and take on the title Debtor in Possession (DIP). This means that the business acts as its own trustee (whereas trustees are generally appointed in Chapter 7 cases), and is subject to the courts in terms of jurisdiction and oversight. As with personal bankruptcy, companies who file for Chapter 11 typically consult with a Bankruptcy Attorney, as the filing process is very involved and oftentimes complicated. Under Chapter 11, the debtor works directly with a Bankruptcy Court and the creditors to whom they owe to devise a plan of repayment. Creditors first vote to approve this plan, and once it is set, the debtor can resume operations while paying down the debt.
Chapter 11 offers a debtor several different mechanisms for restructuring its business. For example, the DIP can garner financing and loans from lenders by promising them first priority on subsequent company earnings. And throughout this entire process, Chapter 11 Bankruptcy offers the protective benefits of Automatic Stay. Automatic Stay stipulates that as of the onset of bankruptcy proceedings, all lawsuits, debt collection and other litigation proceedings come to a complete stop until they can be resolved in bankruptcy court. This helps to the keep the company from having to focus on anything except day-to-day operations and working to get out from under debt.
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So what's the Plan?
The first stage of the Chapter 11 Bankruptcy plan is proposed by the debtor - a reorganization period of time (typically 120 days) that the debtor uses to pay off debts as they see fit (and as approved by the courts). Bankruptcy laws stipulate that after that time period has elapsed, creditors can propose additional plans to round out the remainder of payment. These plans must satisfy criteria set forth by the Bankruptcy Court in order to be "confirmed" and put into action; otherwise, the court may convert the case to Chapter 7 and begin liquidation, or, if its in the best interests of the debtor and creditors, the case may be thrown out all together in a return to the status quo. If this is the case, creditors will then typically seek out non-bankruptcy options to assist in the collection of debts. Finally, depending on the size and scope of the business and its corresponding bankruptcy, debtors may emerge from bankruptcy within several months to several years.
Is Stock Affected?
If a public company enters into Chapter 11, it ceases to be listed from its primary stock exchange. Stocks that are delisted quickly become re-listed as over-the-counter (OTC) stocks, and in the majority of cases, the Chapter 11 plan eradicates shares of the company, rendering them completely without value.
Why Chapter 11?
In generating Chapter 11 under United States Bankruptcy Code, the government concluded that it is sometimes in the company's (and the public's) best interest to let a company restructure itself and pay off at least some (if not all) debts to creditors while remaining open for business, rather than liquidate its holdings and completely shut down for good. This is especially relevant when considering the recent recession - many major financial operations went bankrupt, but because of Chapter 11, were able to stay afloat and keep the economy from completely collapsing. This is yet another testament to the fact that, although bankruptcy is no cakewalk and certainly has far-reaching ramifications, it is a useful tool designed to ensure businesses (and individuals) get the second chance they deserve to grow and prosper.
For a review of debt relief alternatives to bankruptcy in California and to get a free debt relief analysis along with a savings estimate, simply answer a few questions online.
