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Bankruptcy - Chapter 11

Chapter 11 bankruptcy may be referred to as a form of a corporate financial reorganization wherein, the assets of a company are sold to compensate for the dues which the creditors are entitled to receive.

In some instances, it has been observed that despite filing for Chapter 11 bankruptcy, the companies are allowed to go on functioning. The concept is that the businesses which are allowed to continue operating, will continue supporting employment, generate revenues and in due course repay the creditors. On the other hand, businesses which are not allowed to function fail to make the optimum utilization of the resources of the company. Many a times, businesses often opt for Chapter 11 not only to repair their finances but due to political reasons also.

People often complain that Chapter 11 bankruptcy has a very relaxed approach in the United States of America. This is because; companies filing Chapter 11 bankruptcy are allowed to go on operating. In the European nations, however, the management team in the higher strata is either replaced altogether or removed from their services.

Eligibility conditions for filing Chapter 11 bankruptcy

There are several publicly traded business houses which do not have the right to file Chapter 11 bankruptcy. These may include few business conglomerates, insurance companies and companies offering utility services. Instead, they have to redistribute as well as reassign funds to repay the creditors.

Filing for Chapter 11 bankruptcy has both advantages as well as disadvantages. They are given below. Advantages of filing Chapter 11 bankruptcy

Some of the advantages of filing Chapter 11 bankruptcy are as follows-

  • The most important aspect of filing Chapter 11 bankruptcy is that it gives you some time. You can “buy” time.
  • Contracts can be either rejected or accepted by you.
  • Proposal of a reorganization plan of the balance sheet can be worked out.

You can enjoy an “automatic stay” soon after filing Chapter 11 bankruptcy.

Disadvantages of filing Chapter 11 bankruptcy

Just as Chapter 11 bankruptcy has few advantages, the disadvantages cannot be ruled out either. Some of the disadvantages are given below-

  • The fees you need to pay to your attorneys have to be borne by you. The fees can be astronomical at times (USD$100,000 plus).
  • The judge who is dealing with business bankruptcy and the appointed trustee inspect the activities of the leaders of the firm prior to as well as after Chapter 11 bankruptcy is filed. As a consequence, civil penalties may result, which in turn may lead to imprisonment and arrest.
  • In majority of the cases, companies filing Chapter 11 bankruptcy are unable to pay such high court fees and fees for attorneys under the existing conditions. Under these circumstances, the judge orders liquidation against assets. This may prove to be disastrous for the companies filing Chapter 11 bankruptcy.
  • The judge keeps a close watch over the activities of the company but the major decisions pertaining to the company are taken by the judge.

Under these circumstances, you should avoid filing for bankruptcy by all means. Try out various other debt relief options and only if they fail to meet your financial requirements, should you opt for bankruptcy. Bankruptcy should be the last resort.