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Encyclopedia > Chapter 11

Chapter 11 of the Bankruptcy Code governs the process of reorganization under the bankruptcy laws of the United States. (In contrast, Chapter 7 governs the process of a liquidation bankruptcy.) Bankruptcy is enabled by the United States Constitution, but its implementation is by statute. ... Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. ... Liquidation under a Chapter 7 filing is the most common form of bankruptcy in the United States. ...

Contents


Definition

When a troubled business decides that it is unable to service its debt or pay its creditors, it can file (or be forced by its creditors to file) with a federal bankruptcy court for bankruptcy protection under either Chapter 7 or Chapter 11. A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations. A Chapter 11 filing, on the other hand, is an attempt to stay in business while a bankruptcy court supervises the "reorganization" of the company's contractual and debt obligations. The court can grant complete or partial relief from most of the company's debts and its contracts, so that the company can make a fresh start. Often, if the company's debts exceed its assets, then at the completion of bankruptcy the company's owners (stockholders) all end up with nothing — all their rights and interests are terminated — and the company's creditors end up with ownership of the newly reorganized company, in the hopes that it will eventually succeed financially as compensation for their losses. Liquidation under a Chapter 7 filing is the most common form of bankruptcy in the United States. ... A court is an official, public forum which a public power establishes by lawful authority to adjudicate disputes, and to dispense civil, labour, administrative and criminal justice under the law. ... A contract is any legally-enforceable promise or set of promises made by one party to another and, as such, reflects the policies represented by freedom of contract. ... Debt is that which is owed. ...


Rationale

It is thought that the value of a typical business as a going concern is far higher than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it is more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were cancelled; in this way, jobs are saved, assets are retained, the engine of profitability which is the business is maintained rather than being dismantled, and, hopefully, the business's creditors end up with more money than they would in a Chapter 7 liquidation.


Chapter 11 details

All creditors who register with the court can be heard by the court, which is responsible for determining whether the plan of reorganization complies with the purposes of the bankruptcy law and provides for fair and equitable treatment of all parties in interest. Priority of claims is determined by Section 507 of the Bankruptcy Code, but as a general rule secured creditors, such as some banks and bondholders, have a higher-priority claim on the proceeds of the sale of corporate assets than unsecured creditors, such as vendors who have not been paid for products they previously delivered to the company (and who don't have any collateral for their claim). Once a business files for Chapter 11 bankruptcy, its creditors are not allowed to attempt to collect previously incurred debts except through the bankruptcy court. Under some circumstances, the creditors or the United States Trustee can ask the court either to convert the case to a liquidation under Chapter 7, or to appoint a trustee to manage the debtor's business. The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors (appointment of a trustee also requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare). For alternate meanings, such as chemical bond, see Bond (disambiguation). ... The United States Trustee is the appointee charged with enforcing civil bankruptcy laws in the U.S.A. The U.S. Trustee also makes reference in criminal cases to the United States Attorney. ...


Typical debts and contracts cancelled in a Chapter 11 bankruptcy include unsecured loans and, if cancelling them would be financially favorable to the company, union contracts, supply or operating contracts (with both vendors and customers) and long-term real estate leases. A union (labor union in American English; trade union, sometimes trades union, in British English; either labour union or trade union in Canadian English) is a legal entity consisting of employees or workers having a common interest, such as all the assembly workers for one employer, or all the workers...


Once Chapter 11 is filed, the company may "emerge" from bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. All debtors filing Chapter 11 cases are required to propose a plan of reorganization: if the debtor fails to make a proposal, the court may consider proposals from creditors. If no plan of reorganization is approved by the court (this process is called confirmation) then the court may either convert the case to a liquidation under Chapter 7 or, if in the best interests of the creditors and the estate, the case may be dismissed resulting into a return to the status quo ante bankruptcy.


If the company's stock is publicly traded, a Chapter 11 filing causes trading on it to be transferred to the NASDAQ if primary trading on it had been previously conducted at either the New York Stock Exchange or the American Stock Exchange, and the identifying letter "Q" is added to the end of its stock symbol, which is also lengthened to four letters, not including the "Q," if such a transfer is necessary (formerly, the site at which such a stock was traded was not moved and the "Q" was placed in front of the pre-existing stock symbol; a celebrated example was Penn Central, whose symbol was originally "PC" and became "QPC" after the company filed Chapter 11 in 1970). NASDAQ MarketSite (Times Square, New York City) at night NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations) is a U.S. electronic stock exchange. ... New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE) is the second largest stock exchange in the world. ... The American Stock Exchange (AMEX) is a stock exchange operated by American Stock Exchange LLC, a subsidiary of the United States of America. ... The Penn Central Transportation Company, normally called Penn Central, was an American railroad company, headquartered in Philadelphia, Pennsylvania and formed by the merger on February 1, 1968 of the Pennsylvania Railroad and the New York Central Railroad; the New Haven was added to the merger at the insistence of the... 1970 was a common year starting on Thursday. ...


Individuals may also file Chapter 11, but due to the complexity and expense of the proceeding, this option is rarely chosen by debtors who are eligible for Chapter 7 or Chapter 13 relief. Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. ...


Largest bankruptcy

The largest bankruptcy in history was of the US telecommunications corporation Worldcom, Inc., which listed over 103 billion dollars in assets as of its Chapter 11 filing in 2002; the bankruptcy was triggered by the discovery that in the previous several years, the company had fraudulently overreported its assets by an estimated 12 billion dollars. For a time, WorldCom (WCOM) was the United States second largest long distance phone company (AT&T was the largest). ...


2003 statistics

Bankruptcy filings by individuals as of 2003: 2003 is a common year starting on Wednesday of the Gregorian calendar, and also: The International Year of Freshwater The European Disability Year Events January events January 1 Luíz Inácio Lula Da Silva becomes the 37th President of Brazil. ...

  • Chapter 7 filings: 1,156,284
  • Chapter 11 filings: 959
  • Chapter 13 filings: 468,562

Bankruptcy filings by businesses:

  • Chapter 7 filings: 21,008
  • Chapter 11 filings: 9,185
  • Chapter 12 filings: 698
  • Chapter 13 filings: 5,201

The total number of bankruptcies rose 7.4 percent over the previous twelve months. These totals were for the 12-month period ending September 30, 2003.


Source: November 14 2003 News Release, Administrative Office of the U.S. Courts. (External link to PDF file: [1])


See also

Liquidation under a Chapter 7 filing is the most common form of bankruptcy in the United States. ... Chapter 12 refers to Chapter 12 of Title 11 of the United States Code, a chapter of the Bankruptcy Code. ... Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. ...

External links

  • Complete Title 11 (ZIP file)
  • Chapter 11 (DOC file)
  • US Bankruptcy Court brochure on Chapter 11
  • 15 Largest Corporate Bankruptcies

  Results from FactBites:
 
Chapter 11, Title 11, United States Code - Wikipedia, the free encyclopedia (693 words)
Chapter 11 of the Bankruptcy Code governs the process of reorganization under the bankruptcy laws of the United States.
A Chapter 11 filing, on the other hand, is an attempt to stay in business while a bankruptcy court supervises the "reorganization" of the company's contractual and debt obligations.
Individuals may also file Chapter 11, but due to the complexity and expense of the proceeding, this option is rarely chosen by debtors who are eligible for Chapter 7 or Chapter 13 relief.
  More results at FactBites »

 
 

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