What is chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a form of bankruptcy reorganization which typically allows companies to continue to function while they propose a debt repayment plan. The theory here is that otherwise viable businesses that are allowed to continue to operate will generate revenue, protect jobs, and be able to pay off creditors over time.

Advantages of Chapter 11 Bankruptcy

Selling off the assets of the company to pay debts is a possibility, but it may not satisfy all of the indebtedness, and could force a business to close its doors. In many cases, a reorganization which allows for a repayment plan that everyone agrees to makes more sense.

A Chapter 11 debtor that maintains control of its business is called a “debtor in possession.” Chapter 11 affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business’ earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.

Who Qualifies to file for Chapter 11 Bankruptcy?

Chapter 11 may be filed by corporations, LLCs, and partnerships. Individuals may also filed Chapter 11 but generally do so only if they have too much debt to qualify for a Chapter 13, because a Chapter 11 proceeding is much more complicated and expensive than a Chapter 13.

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