Chapter 11 allows debtors to continue operations.
Chapter 11 of the U.S. bankruptcy code provides a path for an individual or organization filing for bankruptcy protection to declare a plan to pay back outstanding debts over time and to continue operations.
History
Chapter 11 emerged out of reforms to bankruptcy law in the midst of the Great Depression. After a Congressional investigation of bankruptcy, President Roosevelt signed the Bankruptcy Reform Act in 1934, which sought to enable "amicable" solutions to conflicts between debtors and creditors and allow for the gradual repayment of debt. Later amendments to this bill merged several chapters of the bankruptcy code into one, Chapter 11, that deals with corporate reorganization.
Chapter 11 Plan
Chapter 11 allows a debtor to continue normal operations and restructure a business under the condition that the debtor develop and implement a "bankruptcy plan." This formal blueprint outlines the process by which a debtor pays back creditors and emerges from bankruptcy. A bankruptcy court must approve this plan. Creditors may express objections to a bankruptcy plan and may vote on whether or not to approve a proposed plan.
Continuing Operations
Under Chapter 11, a debtor generally remains in control of assets and continues to operate a business normally. Although creditors assume partial ownership of the new business, Chapter 11 designates the debtor as a fiduciary for the creditors and the trustee responsible for the business. Chapter 11 debtors may attain financing, sell off assets and restructure debts in order to pay back creditors.
Who Can Declare Chapter 11
Large corporations most commonly use Chapter 11 bankruptcy, since Chapter 11 allows debtors to restructure debt without stipulating a debt ceiling. Individuals occasionally file under Chapter 11 but more use Chapter 7 or 13. Chapter 11 stipulates that an entity may not file under Chapter 11 if it filed another bankruptcy petition that was denied by a court as a result of lack of compliance during the preceding 180 days. An individual filing under Chapter 11 must receive credit counseling within 180 days before filing.
Disadvantages
The too-lax Chapter 11 doesn't provide the right incentives to debtors to restructure their debt properly, according to Michael Bradley and Michael Rosenzweig in their article "The Untenable Case for Chapter 11" ("The Yale Law Journal," Mar. 1992). They argue that most companies are ultimately unable to pay off creditors and become profitable.
Advantages
Those in favor of the title claim, including Elizabeth Warren and Jay Westbrook in "The Success of Chapter 11" ("Michigan Law Review," Feb. 2009), argue that many companies are able to emerge successfully from a Chapter 11 bankruptcy, and that those that aren't are usually eliminated and shut down quickly. Chapter 11 provides a way for fledgling businesses to continue operating while paying off their debts.
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