Under US laws, Chapter 11 Bankruptcy is filed by a corporation or an individual who wants to reorganize their business, but can’t pay their bills in the short run. This is usually filed by corporations and not so much by individuals.
When a business finds itself unable to pay off its debtors, but thinks that they can still reorganize and keep the business running, they file a Chapter 11 bankruptcy.
- The business filing Chapter 11 bankruptcy gets a fair chance to reorganize the business and run it back to profitability.
- Unlike Chapter 7 bankruptcy where the business is liquidated, in Chapter 11, an attempt is made to restore the financial health of the business.
- Unlike Chapter 13 bankruptcy, there is no limit on the size of the debts, to go for Chapter 11.
- The court protects the debtors against creditors and helps the debtors to restructure the business. In return, the creditors may get part-payment of their debts and ownership in the newly reorganized business.
- Initially, the debtors will propose a plan for reorganizing which will be vetted by the courts. After the lapse of a certain time period, creditors may also propose a reorganization plan.
- Quite often, businesses that go for Chapter 11 have more assets than liabilities, but do not have enough money to pay their bills. For example Circuit City had assets worth $3.4 billion and liabilities worth $2.32 billion. But, still they were forced to enter bankruptcy because they were facing a situation where they would not be able to pay their bills any longer.
Chapter 11 bankruptcy laws were instituted because it was thought that in some cases, a reorganized business will be worth much more than a liquidated one.
However the rate of success in Chapter 11 bankruptcy has been very low and only about 10% businesses emerge healthy out of Chapter 11.
Chapter 11 is also considered to be one of the more flexible bankruptcy laws. However it is quite a complex law as well and therefore not many individuals go for it.