Unlike common forms of bankruptcy for individuals, chapter 11 bankruptcy may not be as well known. This kind of bankruptcy is usually utilized by businesses that wish to reorganize, but individuals can use it on rare occasions. In a tough economic environment, there can be a domino effect with businesses and financial problems. Here is some important information on business entities and reorganization.
Differences
When a business faces possible insolvency it may opt for an 11 or 7 bankruptcy. In 7, a business is liquidated and all company assets are sold. The money is then distributed to the creditors. 11 allows a company to remain in business, and the business owner may be known as a debtor in possession. Even though an owner operates the business, it is still overseen by bankruptcy court.
Chapter 11 Main Features
Business reorganization has many similarities to other forms of bankruptcy. A trustee is appointed to manage and operate the business in reorganization. In many cases, the owner of a company can become the trustee. However, the court has the right to assign a different trustee to run things, in this early stage of reorganization.
Debtor in Possession
In reorganization, the debtor in possession can borrow money to keep the company in business, and to eventually work out of bankruptcy. If the business owner allows lenders priority on company profits, he or she may be able to borrow money on easier terms.
Court Protection
The owner in reorganization has protection from creditors taking legal action against him or her. At the time of filing, an automatic stay order is issued by the court. This stops all creditors from suing the business. During this time, the owner may cancel certain business contracts, if necessary.
Many times, reorganization will work out well for a business owner. However, there are cases, where there is no happy ending. For example, if the company debts are greater than the assets, reorganization stops. The creditors have the right to seize assets and take over the company.
Company Liquidation
Most of the time, a reorganization does not include liquidation of company assets, but there are exceptions. A chapter 11 plan can sometimes include liquidation, depending on the situation. The owner has 120 days to present his or her reorganization plan to the court. If this is not done, the creditors may present a plan for approval.
Trading Stock
A company may be traded on the major stock market exchanges, and reorganization will result in the stocks removal. These stocks will not have any value, either, However, it is not uncommon for companies in reorganization to have stocks available over the counter, within a short amount of time.
Final Thoughts
Many people know about bankruptcy, but few know a great deal about chapter 11 bankruptcies for business. There are rare cases, where this form of bankruptcy can be utilized by individuals, but it is uncommon. Business are reorganized in chapter 11, and the business owner often retains control over the company. Owners in reorganization are allowed to reject or cancel contracts, and also borrow money on the business. When reorganization is filed, the business receives and automatic stay, which protects against law suits until there is a bankruptcy judgment. There is a 120 day time limit for a business owner to present his or her reorganization plan to the court. If there are company stocks, they may lose all of their value as soon as filing occurs
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