Unlike common forms of bankruptcy for individuals, chapter 11 bankruptcy may not be as well known. This kind of bankruptcy is usually utilized by businesses that wish to reorganize, but individuals can use it on rare occasions. In a tough economic environment, there can be a domino effect with businesses and financial problems. Here is some important information on business entities and reorganization.
Difference in Bankruptcies
When a business faces possible insolvency it may opt for an 11 or 7 bankruptcy. In 7, a business is liquidated and all company assets are sold. The money is then distributed to the creditors. 11 allows a company to remain in business, and the business owner may be known as a debtor in possession. Even though an owner operates the business, it is still overseen by bankruptcy court.
Chapter 11 Main Features
Business reorganization has many similarities to other forms of bankruptcy. A trustee is appointed to manage and operate the business in reorganization. In many cases, the owner of a company can become the trustee. However, the court has the right to assign a different trustee to run things, in this early stage of reorganization.
Powers Granted to the Debtor in Possession
The debtor in possession has the power to take out loans to keep the business going. The owner or trustee can use company profits for loan collateral. In some cases, this can result in the best financing terms for any company that is in reorganization.
The owner in reorganization has protection from creditors taking legal action against him or her. At the time of filing, an automatic stay order is issued by the court. This stops all creditors from suing the business. During this time, the owner may cancel certain business contracts, if necessary.
After restructuring, all company assets will be added up. They will be compared with the total about of debt that is owed. If there is more debt than assets, then the owner loses his or her company. The creditors have a right to take possession of all assets, including the business.
Most of the time, a reorganization does not include liquidation of company assets, but there are exceptions. A chapter 11 plan can sometimes include liquidation, depending on the situation. The owner has 120 days to present his or her reorganization plan to the court. If this is not done, the creditors may present a plan for approval.
If the company appears in one of the three major exchanges, it will be removed from the listings as soon as bankruptcy is filed. These stocks soon become worthless or of no monetary value. However, stocks often reappear as over the counter stocks.
If a company is facing dire financial problems, it may choose to reorganize under chapter 11 law. These laws can pertain to individuals, but it is uncommon. During reorganization, an owner may retain control of his or her business operations. However, this is up to the court. When reorganization is filed, and automatic stay protects the company from legal action, until the court judgment. Businesses have 120 days to present their reorganization plan to the court, or else the debtors may present a plan. Also, when reorganization is filed, stock trading ceases.
Learn more about bankruptcy and how it applies to business now in our comprehensive guide to all you need to know about Chapter 11 bankruptcy on http://www.governmentinsolvencyact.com