Understanding Chapter 11 Bankruptcy

By: Jay Anderson

The bankruptcy decision in itself is a federal court process that has been designed to assist consumers and businesses alike to eliminate debt or repay financial obligations under the protection of the Bankruptcy courts. These fall into two categories, "re-organizations" and "liquidations".

A chapter 11 bankruptcy filed in terms of the US Bankruptcy Code is often referred to in one word as being a "reorganization" bankruptcy. Basically Federal Bankruptcy laws govern how a company goes out of business and go about recovering from crippling debt to become profitable again. This is generally accomplished by use of a management plan that is under the executor-ship of the bankruptcy courts.

When a business files for protection under chapter 11 bankruptcy, it is required to re-organize. In this case the businesses management will continue to pursue day-to-day operations, although the bankruptcy courts are required approve all major business decisions. Chapter 11 is the only section of the bankruptcy code that allows business operations to continue, and if and when the business manages to re-organize they may be allowed to exchange old stocks and bonds for new ones in the company, even though the new stock may be worth less than the original stocks and bonds in the business. Whatever happens, it is up to the Bankruptcy court to determine if stockholders receive anything or whether the debtor is insolvent or not.

If a business decides to file under chapter 7 of the Bankruptcy code, it will have to stop all operations and go out of business. The Bankruptcy court then appoints trustees to completely liquidate all assets of the company and pay off all debt. These debts include creditors and investors. Generally speaking, stockholders may recoup a fraction of their investment, but the stocks of a chapter 7 business are usually worthless.

By contrast, chapter 7 or the "liquidation" type of bankruptcy, any property that is not exempt under your particular state laws is able to be sold or "liquidated" to pay back part of the debt owing. It is often referred to separately as "consumer, chapter 7" and "business chapter 7" bankruptcy and typically lasts three to six months.

In Chapter 7 bankruptcy some property may be sold to reduce the debt, however most unsecured debt will be erased or eliminated from the debt profile, and you may be allowed to keep classified properties such as clothing, cars and furnishings. Secured debt is another story; say for example your car has been pledged as a guarantee, you have the choice of allowing the creditor to repossess the car or paying a lump sum to the creditor that is equal to the current replacement value. Some kinds of secured debt may be eliminated.

Chapter 13 is the most common of all methods of "re-organization" bankruptcy for general consumers and means that they are able to hold onto their property, but repayments must be made and met to ensure that over a three to five year period all debts will be repaid.

All forms and chapters of bankruptcy have a wide variety rules and regulations and exceptions to those rules and regulations. In essence it is a very complicated process. These laws dictate what property you can and cannot keep and what kinds of debts are covered.

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For more insights and additional information about Chapter 11 Bankruptcy as well as getting a free bankruptcy evaluation from a qualified bankruptcy lawyer local to you, please visit our web site at www.bankruptcy-data.com

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