Chapter 11 Bankruptcy - What Is It?

Business is often about taking calculated risks. Whilst the property boom was unsustainable, nobody saw the financial meltdown we have all experienced coming. Unfortunately even some of the best run businesses have had to tighten their belts by shedding staff, while others have simply gone to the wall.

Even healthy companies have found traditional lenders reluctant to extend credit, as banks have become overly cautious and look out for themselves. However, without credit to cover the short term ups and downs, many businesses have been unable to maintain their financial commitments.

When businesses can no longer meet their commitments, many turn to chapter 11 bankruptcy.

Chapter 11 bankruptcy is not a situation where all is lost and the company folds. Certainly, if the bankruptcy court trustee feels that the business has no future and its problems go well beyond cash flow, chapter 7 may be invoked and that really is the end of the line, but chapter 11 allows the company to continue trading under a legally binding repayment plan.

In this way the court reschedules the company's outstanding debt so that the company can make repayments to creditors in the longer term, thus it can continue trading and "catch up" with its financial commitments.

Chapter 7 requires the liquidation of all assets, which means that if a company goes down this road, the business is effectively finished. Chapter 11 requires no sale of assets, indeed the assets are necessary to allow the company to continue trading, and in the court's eyes, to repay its creditors.

That is not to say that there is no financial loss incurred. The repayment plans terms can be quite harsh and leave very little spare cash. In addition, any company that files for bankruptcy cannot expect its market value not to fall.

Assets that the trustee deems are not essential to the business may have to be sold to raise cash so that a realistic repayment plan can be implemented. The main focus is always on ensuring that the creditors get paid.

Some companies are not allowed to file for bankruptcy, but the rules vary from state to state, so the state that the company is located in has a major bearing on financial matters when things get tough.

Global businesses present an especially difficult challenge when it comes to bankruptcy simply due to their huge size and geographic locations.

These large enterprises can change their structure to limit their liability under chapter 11, often at the expense of their creditors, many of whom are often much smaller in scale, and lack the financial muscle to take the corporations on.

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