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The Basics of Chapter 11 Bankruptcy

Aug 17, 2007
Corporations that get into deep financial trouble have the option of filing for Chapter 11 bankruptcy protection. This is basically the process of the courts ordering the company's creditors to cease their pursuit of monies extended to the business in the form of credit.

This often happens because the company's finances get mismanaged and the debt piles up until it becomes too overwhelming to repay. As a result, the court appoints a trustee to oversee the company's debts and assets in order to help repay the creditors in a timely and efficient manner.

Corporate bankruptcy involves much of the same process that personal bankruptcy does. The main difference, however, is that creditors can force a business into Chapter 11 bankruptcy because it ensures that the court will take control of the finances.

When this happens, the creditors have a better chance of being repaid by the business. This type of business bankruptcy often allows the company to continue generating revenue for the creditors while the business gets its finances and assets in order.

When a business files for corporate bankruptcy in which its debts are greater than its assets, the stockholders receive nothing after the bankruptcy is completed. Essentially, they lose all rights that they had to the company and its assets. As a result, the creditors take control of the company in order to help it retrieve the monetary losses incurred by extending credit to it. This is also done to help save the jobs that the corporation provides and to help retain the profit-making capabilities of the business.

Although it is a good idea for a failing business, bankruptcy has many critics who feel that it is harmful to allow corporations to file for the court's protection from its creditors. Many critics say that it is unfair for a company to continue to operate once it has filed for bankruptcy. The reason is that the company can cease paying its debts and use that money for improving the business.

As a result, the company has an advantage over its competitors because it has more money to unduly put into acquiring more customers, planning better products, and much more. Others say that Chapter 11 bankruptcy only perpetuates the problem of bad financial management in the upper tiers of the corporation's executives. Filing for bankruptcy protection only adds to this problem by maintaining the practice of bad financial management.

The reasons for Chapter 11 bankruptcy vary among the different corporations in need of the services that it provides. Whether or not it is good for the economy, it is still a practice that does not go unused. This is proven by recent occurrences, such as K-Mart and WorldCom, in which major corporations filed for business bankruptcy protection in order to have their debts reorganized while remaining in business and creating revenue.

While it may provide unfair advantages and a continuing practice of financial mismanagement, it is sometimes a necessary method to save some corporations from a complete shutdown.
About the Author
Mike Selvon is the owner of various niche portals. Our bankruptcy portal is a great resource for more information on the basics of chapter 11 bankruptcy. While you are there don't forget to claim your free gift.
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