An Overview of Chapter 11 Bankruptcy Code
What is Chapter 11 Bankruptcy Code?
The Chapter 11 Bankruptcy Code is part of the United States bankruptcy code found under the Bankruptcy Laws that allows for reorganization of businesses and individuals. This law is available to corporations, sole proprietors, partner firms as well as individuals. However majority of the users of this law are corporate entities.
How does Chapter 11 Bankruptcy Code work?
In Chapter 11 Bankruptcy Code, the debtors are given room to reorganize themselves and have a role in the decision making process of the firm despite their situation. The court in this case offers the debtors up to 120 days to come up with a plan for reorganization. The plan must give details on how the firm will be run and how the creditors involved with the firm will be paid off. This is basically called a plan and once the firm has come up with a viable solution it must present this to the court and the creditors.
In most cases the court will take time to scrutinize the plan and also allow the creditors room to give their views. Where one creditor is unsatisfied with the plan, the court will rule depending on whether the plan discriminates that particular creditor or not. If the plan discriminates the creditor then it cannot go through and the debtor must go back to the drawing board or accept other plans brought forward by parties involved including the creditors.
There are several ways through which the debtor can restructure their business and recoup from their situation. These include getting a loan to reenergize the business back on track. The debtors can also merge with other firms and pay off the creditors in installments.
What are the advantages of Chapter 11 Bankruptcy Code?
There are many reasons why corporate bodies prefer to invoke Chapter 11 Bankruptcy Code as opposed to the Chapter 7. This law does not liquidate the debtor’s property and hence it is still much easier for the debtor to recover from their financial crisis. When compared to the Chapter 7 bankruptcy law, Chapter 11 actually gives room to the debtor to restructure their business and hence rebuild their financial life.
Additionally, when a debtor files for bankruptcy under Chapter 11, they have higher chances of being appointed as the trustees of their firms. This is unlike Chapter 7 where a separate trustee is given the mandate to liquidate the business assets and pay off the creditors and give the residuals to the debtor. In Chapter 11, the debtor can still exercise some control over the business and assets.
Chapter 11 Bankruptcy Code also helps the debtor invoke an automatic stay law. This basically protects the debtor from the creditors. Automatic stay requires that creditors refrain from any actions appertaining to collecting their debts from the debtor. It recognizes the fact that the debtor is working towards debt repayment and protects them from harassment from the creditors. There are several firms that have used the Chapter 11 Bankruptcy Code to salvage their finances during crisis. The biggest case ever handled under this law is the Lehman Brothers Holdings Inc. which listed $639 billion in assets whilst filing for bankruptcy in 2008.
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