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Chapter 11


Bankruptcy happens when business is unable to pay its debts and creditors. Business can file with federal bankruptcy court  for protection, usually under chapter 7 or chapter 11. In the United States bankruptcy is governed by federal law commonly referred to as the "Bankruptcy Code". Bankruptcy cases are filed in the U.S. Bankruptcy Court and federal law govern procedure in bankruptcy cases but state laws are often applied to determine how bankruptcy affect property rights and debtors.

Two major types of bankruptcy are Chapter 7 and Chapter 11. Chapter 7 happens when company ceases all of its operation and goes completely out of business. A trustee is appointed to sell (liquidate) company's assets in order to pay off its debt. Debts are payed off according  to absolute priority. It is rule that secured claims are paid before junior claims are paid. In that order secured creditors are paid first, then bondholders and in the end shareholders. In other words, investors that aim for higher return must  accept the higher possibility of loss. Chapter 11 is named after the U.S. bankruptcy code 11 and it allows debtor (company) to reorganize its operations, debts and assets. In this way company still have a chance to return to normal business operations and financial health. By using Chapter 11 company is given needed time to restructure its debt.

Chapter 11 bankruptcy is available for all businesses. Length of bankruptcy and how quickly company will come out of it depends on the its size and complexity. To reorganize the company and put it back on its feet the Bankruptcy Code uses bankruptcy plan. Debtor has an opportunity to propose the plan first and it must also be in the interest of creditors. Company filing bankruptcy is often called debtor in possession because company still holds property on which creditor has rights and remain in control of its business operations. Good thing is that business is still running while a company is in the process of bankruptcy. If company fulfill obligation under the re-organizational plan it can have a fresh start. Debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business earnings.Debtor is also protected from other litigation against business through the imposition of the automatic stay (automatic injunction that halts actions of the creditors, with certain exceptions, to collect debt from debtor who has declared bankruptcy). Most litigation is put on hold. Even though the process of Chapter 11 is complex it will pay off if done right and it will give company new chance to be successful.
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