Chapter 11 Bankruptcy

Filing for Chapter 11 bankruptcy is a class of action reserved for businesses and corporations. It is not an appropriate type of bankruptcy to file for personally. An individual should decide between a creditor/consumer proposal, Chapter 7 or Chapter 13 bankruptcy.

Chapter 11 is a much different process than a personal bankruptcy. A trustee of receiver is brought in to access the bankrupt entity. Unlike many personal

bankruptcy cases a business will have to liquidate assets and try to make repayments to debtors. There is also an obligation for the company to prove there is no malice or fraud in their declarations.

In the last few decades there have been an alarming upward trend of companies filing Chapter 11. This could be due to tough financial times, companies trying to get out from underneath onerous pension plans, or simply a way for a company to restructure it’s finances and debt

It is alarming how many companies have been able to write off debts to the creditors and then turn around and start ordering supplies from them right away. The rules are different, and maybe they should be. It is in the bankruptcy court and trustees interest to try and save companies that are in default, but hire a lot of people. The rules and procedures for Chapter 11 filings are totally different from personal bankruptcy. Don’t confuse the two.

Think of Chapter 11 filings as a way for a company that is about to go under to get one last chance to grow. Many do this by presenting a reorganization plan while filing Chapter 11. Once submitted, the creditors and the company’s stockholders vote on whether to go forward with the reorganization. Stockholders are generally very low on the totem pole and have been known to be overruled by the court if they disagree. Of course, if the creditors say no that’s the end of the plan. The court approves the reorganization plan and Chapter 11 is confirmed and certified. The company must comply with the details of the plan including a payment plan.

While in the process of Chapter 11 the company stock value is almost zero.  When the company emerges from bankruptcy and starts to prosper the stock can skyrocket, but not always. Bondholders are usually first in line to get paid during a Chapter 11, but sometimes only a portion of their equity.

If a company defaults during the reorganization period there are dire consequences. A trustee will probably be appointed and brought in to run the break up and sale of assets. Or, the Chapter 11 will be converted into a typical Chapter 7 bankruptcy. This is usually then end of the company as it was known.