Chapter 11 Bankruptcy. Definition. Procedure. Pros & Cons
By Chapter 11 bankruptcy we refer to a form of bankruptcy reorganization that allows businesses to continue their activity and gain profit while also paying off the debts they incurred. Companies that declare themselves bankrupt under Chapter 11 usually have to restructure heavy debts. However, unli
How Does Chapter 11 Bankruptcy Work?Chapter 11 allows businesses who file for bankruptcy to maintain possession of their assets, continue their normal activity, and stay profitable while covering their debts. The business continues to run to allow debtors to pay off the necessary amount to creditors. To ensure this result, the company will operate under court supervision. A creditors committee will also be appointed to supervise the debtor's evolution and to help them put in place the reorganization plan.
When a business file for bankruptcy under Chapter 11, it has to organize an efficient plan to repay its creditors and have it approved by the court and the creditor's committee. This plan will set apart creditors based on the type of claims they have and place them in different categories, such as the priority category that comprises debts owed to tax agencies, stockholder interests, and employee wages.
The debtor is entitled to analyze the creditors' claims and express pertinent objections. Debtors will also need to send monthly reports that allow the court to assess and monitor their evolution.
Once the reorganization plan is approved, the debts incurred before the approval date are discharged, and the company can start to repay its creditors according to the specifications provided in the plan.
What Are the Main Advantages and Disadvantages of Chapter 11 Bankruptcy?The biggest advantage of this bankruptcy form is that it allows business to continue their operations while the repayment plan is implemented.
Chapter 11 is considered the most flexible bankruptcy option, and it grants debtors more time to negotiate with creditors and reach an agreement. Typically, a business will have 180 days to carry out the negotiations, whereas other bankruptcy plans only grant several weeks.
It is also the most expensive choice due to a complex set of regulations that increase the filing costs. This option's complexity also makes it lengthier than other bankruptcy procedures. Bottom line; businesses who are striving to survive might have a hard time in covering their debts under this chapter. It usually takes several years before the process is concluded and all debts are repaid.
The amount the company will finally pay creditors after the procedure is usually completed lower than the initial debt, as specified in the repayment plan.
One of the main reasons why many companies opt for other bankruptcy options is that Chapter 11 has a low rate of success that's estimated at roughly 10 - to maximum 12% and often falls beneath.
Due to the high costs implied by Chapter 11, most small businesses avoid this procedure, yet, this option is not solely dedicated to large corporations.
Whether you manage a large or a small company, it's recommended you reach out to a lawyer who specializes in bankruptcy cases to help you file under the chapter that benefits you the most.