Chapter eleven is oftentimes referred to as "reorganization" or "corporate bankruptcy". This chapter of the United States Bankruptcy Code is used when a business requires time to reorganize their debt to become a viable business again. Any corporation, partnership or sole proprietor can file for Chapter 11 bankruptcy protection.
When businesses file chapter eleven they continue to run their business and are able to control the bankruptcy process. Chapter 11 grants the business time to rehabilitate their business through the development of a reorganization plan. If the business is unable to continue operating the business, they can elect to petition the court for Chapter 7 and liquidate their assets.
When public companies file Chapter Eleven, stockholders are placed at the bottom of the list. Stockholders hold ownership in the company and are unable to collect proceeds until secured and unsecured creditors are paid. Secured creditors typically include banks and other lending institutions. Unsecured creditors include suppliers and bondholders.
During chapter eleven, public corporations are required to provide a copy of the reorganization plan to their investors. During the bankruptcy reorganization phase, bondholders no longer receive interest or principal payments. In some instances, corporations require bondholders to exchange their bonds for stocks. However, bondholders generally have a better chance for recovering their investment than stockholders.
Chapter eleven allows companies to continue trading stocks throughout the period of reorganization. Experts recommend using extreme caution when purchasing common stocks of corporations which have filed for Chapter 11 protection. While there is the potential to reap rewards if the corporation becomes viable, investing in Chapter 11 stocks is risky and can potentially lead to financial loss.
The U.S. Department of Justice appoints a U.S. Trustee to oversee public companies which have filed chapter eleven. A committee is organized to represent the interests of creditors, bondholders and stockholders. The reorganization plan must be presented to and accepted by these parties and confirmed by the court. Upon confirmation, the public company must file a detailed report with the Securities Exchange Commission (SEC).
Chapter eleven can be a beneficial to partnerships and sole proprietors that desire the chance to rebuild their business. However, in some instances, petitioning the court for Chapter 11 can make it more difficult to succeed.
The new bankruptcy laws enacted in 2005 has made obtaining bankruptcy considerably more difficult. Depending on the circumstances, attorney fees and the repayment plan of Chapter eleven may be more costly than negotiating with creditors to pay off outstanding debts.
The strict repayment plan can place a heavy financial burden on business trying to recover from financial ruin. Therefore, it is wise to consult with bankruptcy attorneys before making a final decision.
We invite you to learn more about the various bankruptcy chapters, as well as bankruptcy alternatives in our comprehensive article library. If you are facing personal or business bankruptcy and need solutions to get out of debt, contact Simon Volkov to discuss the various options available.