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Understanding Chapter 11 Bankruptcy

Aug 17, 2007
When a company is unable to service its debt and make payments to its creditors, it may file for bankruptcy protection with a federal bankruptcy court by itself or be forced to by its creditors under Chapter 11 of the United States Bankruptcy Code. This keeps the company in business while the court may allow the company to restructure itself. The court can at times grant complete or partial relief from the company's contracts and debts, providing a fresh start for the company. If the company's debt is in excess of its assets after bankruptcy the creditors end up owning the company. Chapter 11 can stop foreclosures, keep a business operational, and induce a payout of tax, mortgage debts, all equipment debts and lines of credit. Chapter 11 provides a degree of protection from the creditors, lawsuits, and the tax department. It is a means of buying time, to get debt free and start all over again, preserving equity and keeping the company operational. It is supposed to provide for the employees, who face an uncertain future when Chapter 11 bankruptcy is filed.

Filing Chapter 11 Bankruptcy Protection

The debtor must file a written disclosure statement and a reorganization plan with the court. The debtor must state in detail the assets, the liabilities and current business affairs of the company so that the creditors can make an informed decision regarding the acceptance of the debtor's reorganization plan. The US trustee then monitors the debtor and the debtor must pay the appointed trustee a quarterly fee.

The US trustee appoints a creditors' committee comprising the 20 largest creditors, who are not company insiders. The debtors negotiate a restructuring plan with the committee. If that plan is unacceptable to the creditors the debtor is forced to accept a plan provided by the committee. In general, secured creditors, such as banks, have a higher priority on the claims than the unsecured creditors such as the companies, which supply products to the company and have yet to receive payments for the delivered goods.

In most cases the debtors remain in charge and operate the company under the supervision of a bankruptcy court, unless the creditors feel the debtor is inefficient and appoint a trustee to run the company. Once a company files for bankruptcy its creditors must deal with them through the bankruptcy court.

When a company files for Chapter 11 bankruptcy, the company's stock is de-listed from the exchange and the company begins trading as Over The Counter (OTC) stocks. The bankruptcy court renders these stocks worthless when the company emerges out of the bankruptcy.

The debtor has the right to convert to another code of bankruptcy, but has no right to ask for the dismissal of the case. A party of interest such as a creditor, however, may ask for the case to be dismissed after establishing a proper cause such as gross mismanagement of the company, unlikelihood of reorganization by the debtor, and a continued loss of estate.

Several websites provide a sample reorganization plan, explaining in detail the procedures involved and offering help to those that seek bankruptcy as an option. Several websites also provide documentation and other help related to filing for bankruptcy.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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