The Fundamentals of Chapter 11 Bankruptcy Law

A company declares bankruptcy generally to seek the Federal Government's protection. Although a company can opt to file for bankruptcy under Chapter 7 that allows it to liquidate and distributes its assets to its creditors, several companies prefer to file petitions under the Chapter 11 of the bankruptcy law. But what does this chapter really say?

Basically, bankruptcy can be filed when a company does not want to dissolve or liquidate its assets, but only seek to be protected by the government so it can reorganize and recover. The company then, without being dissolved can be awarded legal relief from creditors. The court can impose on company organizations, mostly carried out in the form of letting the creditors operate the company.

The Chapter 11 bankruptcy law operates on the premise that although the company declaring bankruptcy has assets, these are significantly less than their liabilities. Hence, debts will not be paid completely. So even if the company's assets are valuable, the worth of the entire company is greater than its individual asset's worth.

In such cases, bankruptcy under Chapter 11 is filed. The company owners or the stockholders will no longer have a hold of the company, and the court will have the authority to make a ruling as to whom the company should be granted.

This can be beneficial to creditors as they can possibly earn more than when their debtor files bankruptcy under the Chapter 7 law. It also benefits the employees of the bankrupt company as they can hold on to their jobs. And the company assets are kept, leading to profit increase.

In a bankruptcy proceeding, creditors registering at court are allowed to speak. Also in cases where the debtor cannot come up with a proposed reorganization scheme, the creditors initiate the conceptualization of one. This scheme enables them to gain control of the company. Under this chapter, the company shares are usually made worthless meaning that the stockholders are essentially left with nothing.

Importantly though, the company's reorganization scheme has to be approved by the court. Under Chapter 11 bankruptcy law, it's normal to have several reorganization schemes submitted for the court to scrutinize and approve. If the court finds no effective scheme for filing under the Chapter 11 law, the case will be filed under the Chapter 7 bankruptcy law.

Both the Chapter 11 and Chapter 7 bankruptcy cases have the same prioritization preference with regard to creditors. Those who have secured debts are given priority. Those holding collateral are paid first.

Usually, second line creditors won't be able to collect payment too unless the first creditor has been entirely paid. Chapter 11 and Chapter 7 bankruptcies are the same with regard to the ruling that creditors who fail to register within the specified time ordered by the court will forfeit their rights to collect payment.

As a whole, Chapter 11 bankruptcy law grants a company the chance to start anew.

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