Chapter 11 is the chapter of bankruptcy in the United States that is most utilized by businesses. Available to all businesses, it allows for the reorganization of a company that is in financial distress.

When an individual files for bankruptcy, they file Chapter 7 or Chapter 13. Individuals do have to option to file Chapter 11, but it would rarely be beneficial to them because these bankruptcies are time consuming, costly, and in-depth.

When a business files for bankruptcy, they file Chapter 7 or Chapter 11. If a business, or individual, decides to file for Chapter 7, then the assets and the organization itself is liquidated. The company will no longer be intact. The proceeds from the liquidation go first to the creditors that hold secure debt in the company. Once the secured debt has been paid in, other people who are owed money to, such as employees are paid. Usually creditors that hold unsecure debt are the last to be paid.

Who Decides When To File Chapter 11 Bankruptcy?    

The company and its creditors both have the right to propose a reorganization plan when they see fit, or in their best interest. However, only the creditors can vote on the plan, and the company has to follow suit.

Why Would The Invested Creditors Want To File Chapter 11 Bankruptcy, Instead Of Chapter 7?

Some may say to liquidate everything and get your money back while you still can. In a few cases, this would be a wise move. However, in most cases, investors make a wise decision holding on to the company. Some situations in which investors may want to hold on to the company include:

• If it is determined that the “restructured” company may be worth more as a whole, than if it were to be sold piece by piece, then the creditors may opt for Chapter 11.
• During the company’s reorganization period, the creditors have the most control over the company. Although the business owner makes a few of the reorganization decisions, he has to follow the plan agreed on by the investors.
• Under Chapter 11, if the debtor’s debt is more than his assets, he loses control of the company. It then falls into the hands of the creditors. So if the creditors think that the company is worth more as a whole than split up, they may choose to keep the company - even if the company’s debt is more than its assets. They may not lose too much money, and they may feel that they can run the organization better and get more money out of it. 

Main Problem With Chapter 11 Bankruptcy

The idea behind Chapter 11 is the reorganization and restructuring of the company. However, the United States - having one of the most lenient business bankruptcy codes of any first world country – does not require any top level managers to be replaced. So often the same managers continue to hurt their company’s progression and the economy’s stability and growth.