Chapter 11 Bankruptcy

What is Chapter 11 Bankruptcy?

Chapter 11 is one of the types of bankruptcy available to businesses that allows them to reorganize and restructure their financial infrastructure. Companies often choose Chapter 11, as opposed to Chapter 7 because within the laws and regulations of Chapter 11, a company may have more control over their bankruptcy process as well as continue to remain a functioning business while reorganizing their debts and financial structure. This form of bankruptcy is often used by companies who believe that given a second opportunity they could transform their loses and become profitable once again.

What actually happens in the process of Chapter 11 Bankruptcy?

Often times before a company declares Chapter 11 Bankruptcy, their projected reorganization plan detailing how they intend to repay creditors and investors, is voted on by creditors and stockholders. Furthermore, while going through Bankruptcy, one or more committees will be appointed by the Justice Department, or more specifically the U.S. Trustee, to oversee the interests of the creditors and stockholders exclusively. Next, the company and the government committees assigned to the company will draft and finalize a feasible fiscal plan to repay creditors and other investors. Once the committees and the company agree upon this plan, they will file it in court where the U.S. Securities and Exchange Commission will review the plan. Many times, creditors will be allowed to accept or deny this plan and if passed, government officials will confirm the plan in court and the company will then be obligated to follow through repaying creditors in securities or payments called for by stated plan. If the company is unable follow the requirements stated in the plan, they will most likely be required to liquidate.

How are the interests of the investors protected during Chapter 11 Bankruptcy?

First of all, Chapter 11 Bankruptcy is usually declared by a company when they no longer have the capability to repay their contributors, pay off their debts and nor can any longer afford some of their financial contractual obligations. Chapter 11 offers companies in such a predicament the option to restructure their assets and pay back their creditors accordingly, though often within a new time frame.

There are three types of creditors and/or investors: secured creditors, unsecured creditors, and stockholders. Each type of creditor will sustain different damages during the bankruptcy process. Those who take the least amount of risk when investing in a company are called secured creditors, often banks who have the capability to acquire collateral, are always paid back first during bankruptcy. Unsecured Creditors will be the next to claim their losses; these creditors include banks as well, but also suppliers and bondholders. The last of the groups to be repaid are the stockholders, or rather the company owners. This final group accepts the largest amount of risk because in the event that the secured and unsecured creditors cannot be repaid, the stockholders will never receive any repayment for their losses.