Chapter 11 Bankruptcy
Candlefocus EditorThe process of restructuring under Chapter 11 bankruptcy begins with the filing of a petition. This allows the company to gain the protection of bankruptcy law, effectively stopping creditors from trying to pursue the business for collections. After the filing, a neutral third party—the trustee—will be appointed to oversee the process and ensure that the debtor's operations remain compliant with the bankruptcy laws.
The debtor then needs to propose a reorganization plan which offers creditors a payment plan that satisfies their outstanding obligations. The debtor is capable of coming up with a plan themselves but the creditors can also propose their own plan. This plan must provide individual creditors with the same amount they would have received if the company had immediately liquidated all of its assets.
In order for the reorganization plan to be approved, it must be in the best interest of creditors, meet certain legal requirements, and be approved by a majority of creditors or a court. Under the Chapter 11 rules, a company may be able to reduce its debt, obtain additional financing, or sell off certain assets in order to increase its profits.
Chapter 11 bankruptcies provide an opportunity for companies to remain in business while restructuring their liabilities. This type of bankruptcy has been used by major companies such as General Motors and K-Mart, allowing them to move forward in the face of financial distress. Companies can also use Chapter 11 to prevent creditors from pursuing certain collection activities and potentially reorganize the business’s debt in order to improve its financial position. While each case is different, filing for Chapter 11 bankruptcy can provide the opportunity to improve a company’s future outlook and profitability.