Bankruptcy can be filed for by both individuals and businesses when they are unable to pay off debts and there is no other option left to explore. Bankruptcy offers protection from creditors and the federal court ensures that its decisions are in the best interests of the debtor and the creditors. Chapter 11 is a part of the United Stated Bankruptcy Code, and this form of bankruptcy can be applied for by both individuals and businesses whether they are corporations, partnerships or sole proprietorships. Chapter 11 is used most frequently by corporate businesses.
Chapter 11 is different from chapter 7 bankruptcy since the latter puts an end to business operations, the assets of the individual or business are liquidated and used to settle creditor claims. Under chapter 11 the business can continue and the debtor can still control the business but under the jurisdiction of the court and as a debtor in possession. If a separate trustee is not appointed, the debtor himself performs the duties of the trustee.
A significant outcome of the filing of bankruptcy under chapter 11 is that the debtor is offered various options to restructure his business. He can even raise funds by borrowing from new lenders on the condition that he will settle their claims from is first earnings. He is given the power to cancel contracts, and the automatic stay granted, protects him from further litigation by creditors.
If however, the debts of the company are more than its assets, a restructuring will lead to the debtor being left with nothing and it will put an end to all his claims and rights. The ownership will then automatically be granted to his creditors.
Chapter 11 bankruptcy is also referred to as reorganization bankruptcy. Some of its distinctive features are:
- The debtor under chapter 11 can be an individual, partnership, corporation or a business entity
- The debtor will have to submit all statements pertaining to his financial affairs including his detailed list of assets and liabilities
- For a debtor to be eligible for this type of bankruptcy it is essential for him to have received credit counseling from an approved agency at some point in the last six months.
- As the debtor in possession, he has to act in the best interests of the creditors and the business as part of the reorganization process
- A trustee is appointed by the U.S. administrator who has to oversee all the reorganized processes of the business and has to evaluate the reports submitted. He has to arrange meetings between debtors and creditors.
- The debtor is granted an automatic stay and he does not have to face litigations from creditors or collection calls from them.
- If a claim of a certain creditor is not scheduled, he can file a proof of claim document and then get to vote on the reorganization plan of the debtor, and also become part of the creditors list whose claims will be settled if the reorganization yields monetary gains.
Chapter 11 gives the business a second chance to succeed, and establishes a new relationship between debtors and creditors. It is also perceived as an escape route from liquidation which no business wants.