Chapter 11 Bankruptcy - An Overview

Chapter 11 bankruptcy is a type of business reorganization bankruptcy protection which can be filed by sole proprietors or corporations. Unlike Chapter 13 bankruptcy, there are no limits on the amount of debt that exists in order to file. When a petition under Chapter 11 is filed, as with other petitions of bankruptcy under the law, an automatic stay is issued, ceasing all actions by creditors to attempt the collection of debt.

The theory behind reorganization rather than dissolution is that a company may be worth more by allowing it to reorganize and flourish than if it were to dissolve and sell off any assets. For creditors, this is a more appealing choice as they have a better chance of seeing their debt repaid, albeit at a much later date then originally agreed.

Generally, a trustee is assigned to operate the business during the process of reorganization so as to insure the debtors in the proceedings are paid back fairly and equitably. This can often be the debtor themselves as 'debtor in possession'.

One of the benefits of reorganizing under this petition is that the debtor in possession is still able to secure operational financing with very good terms since the lenders of said financing are given first priority for payback. This allows the company to cover business related costs and promotes growth.

What Chapter 11 cannot do, and why many critics are against this form of bankruptcy, is help to rectify poor business management. If a company has come to filing for bankruptcy under Chapter 11 because of poor management, unrestrained spending, or overall bad business practices, chances are their restructuring will fail miserably, and Chapter 7 is not far off in the future.

Chapter 11 has many features built in to assist a troubled company get back on their feet and become a functioning member of the economy once again, but the business itself is responsible for rectifying business practices which may have brought them to this juncture. Of course, there are some factors which cannot be controlled and that is the reason petitions under Chapter 11 Bankruptcy of the bankruptcy law exists in the first place.

Elle Wood recommends to Phoenix area residents considering a Phoenix Bankruptcy to contact the Law Firm of Brian Dault.