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Encyclopedia > Chapter 11, Title 11, United States Code

Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for private individuals. The United States Constitution (Article 1, Section 8, Clause 4), authorizes Congress to enact uniform Laws on the subject of Bankruptcies throughout the United States. ... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration - see text) in the UK. Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration - see text) in the UK. Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their... Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business. ... Corporate redirects here. ... A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no separate existence from its owner. ... Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States. ... Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. ...

Contents

Definition

When a troubled business is unable to service its debt or pay its creditors, it or its creditors can file with a federal bankruptcy court for protection under either chapter 7 or chapter 11. In chapter 7, the business ceases operations and a trustee sells all of its assets and distributes the proceeds to its creditors. This is done in accordance with statutory defined priorities. A chapter 11 filing, on the other hand, is usually 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. A creditor is a party (e. ... A trial at the Old Bailey in London as drawn by Thomas Rowlandson and Augustus Pugin for Ackermanns Microcosm of London (1808-11). ... A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. ... For other uses, see Debt (disambiguation). ...


Rationale

In enacting chapter 11 of the Bankruptcy code, Congress concluded that it is often the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be 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 canceled. Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In this way, jobs may be saved, the engine of profitability which is the business is maintained rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate as a precursor to plan confirmation, the business's creditors end up with more money than they would in a chapter 7 liquidation.


Details

All creditors are entitled to 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.


Some contracts, known as executory contracts, may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts include labor union contracts, supply or operating contracts (with both vendors and customers) and real estate leases. The standard feature of executory contracts is that each party to the contract has duties remaining under the contract. In the event of a rejection, the remaining parties to the contract become unsecured creditors of the debtor.


Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a chapter 11 bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time. After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court. Among other things, creditors must vote to approve the plan of reorganization. If a plan cannot be confirmed 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 in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to nonbankruptcy law in order to satisfy their claims.


As with other forms of bankruptcy, petitions filed under Chapter 11 invoke the automatic stay of § 362. The automatic stay requires all creditors to cease collection attempts, and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask the court 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. Sometimes a company will liquidate under Chapter 11, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare. 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. ...


Priority

Chapter 11 follows the same priority scheme as other bankruptcy chapters. The priority structure is defined primarily by § 507 of the Bankruptcy Code.


As a general rule secured creditors -- creditors who have a security interest, or collateral, in the debtor's property -- will be paid before unsecured creditors. Unsecured creditors' claims are prioritized by § 507. For instance the claims of suppliers of products or employees of a company may be paid before other unsecured creditors are paid. Each priority level must be paid in full before the next lowest priority level may receive payment. A secured creditor is a creditor which has the benefit of a security interest over some or all of the assets of the debtor. ... A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation (usually but not always the payment of a debt) which gives the beneficiary of the security interest certain preferential rights in relation to the assets. ... Collateral within a financial context is used to indicate assets that secure a debt obligation. ...


Stock

If the company's stock is publicly traded, a Chapter 11 filing generally causes it to be delisted from its primary stock exchange if listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ. On the NASDAQ the identifying fifth letter "Q" at the end of a stock symbol indicates the company is in bankruptcy (formerly 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). Many stocks that are delisted quickly resume listing as over the counter (OTC) stocks. In the overwhelming majority of cases, the Chapter 11 plan, when confirmed, terminates the shares of the company rendering shares valueless. Delisting refers to the practice of removing the stock of a company from a stock exchange so that investors can no longer trade shares of the stock on that exchange. ... The New York Stock Exchange (NYSE), nicknamed the Big Board, is a New York City-based stock exchange. ... The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ... NASDAQ in Times Square, New York City. ... 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... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ...


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. ...


Criticism

Some critics have claimed that Chapter 11 bankruptcy is excessively lenient in giving a needless "escape hatch" to the incompetent management of a failing company, damaging the efficiency of the economy as a whole and allowing poor managers to continue managing. It yui like penisteam knows far more about the company and its customers than would a new set of management. These critics note that in Europe, bankruptcy law is far less lenient for failing companies. It has been suggested that Management system be merged into this article or section. ...


Another efficiency criticism is that a company undergoing Chapter 11 bankruptcy is effectively operating under the "protection" of the court until it emerges, in some cases giving the bankrupt company a great advantage against its competitors, distorting the market and harming more competitive businesses. Where a key market participant (or more than one) goes into Chapter 11, it can also result in significant over-capacity in the industry. The most-cited current example is the airline industry in the United States; as of 2006, over half the industry's seating capacity is on airlines that are in Chapter 11 [1]. These airlines have been able to stop making debt payments, freeing up cash to expand routes or weather a price war against competitors — all with the bankruptcy court's approval. This is especially important in the airline industry as fixed capital costs for the airplanes (and the debt on those costs) make up such a large part of the airlines' expenditures. A Boeing 747-400 belonging to Virgin Atlantic Airways, one of the UKs largest airlines. ... 2006 is a common year starting on Sunday of the Gregorian calendar. ... Seating capacity refers to the number of people who can be seated in a specific space, either in terms of the space available, or in terms of limitations set by law. ...


Others criticize the process on the basis that, by forestalling the creditors' rights to enforce their security in the event of non-payment, it reduces the economic value of collateral in the United States, and thereby increases the cost of secured lending. However, studies on the subject seem to reach different conclusions on the extent of this, or indeed whether it is in fact the case at all in practice [2]. Collateral within a financial context is used to indicate assets that secure a debt obligation. ...


Statistics

Federal vs. state bankruptcies

Chapter 11 bankruptcy cases dropped by 60% from 1991 to 2003. One 2007 study[3] found this was because businesses were turning to proceedings under state law, rather than the federal bankruptcy proceedings which include Chapter 11 filings. Insolvency proceedings under state law, the study stated, are currently faster, less expensive, and more private, with some states not even requiring court filings. However, a 2005 study[4] claimed the drop may have been due to an increase in the incorrect classification of many bankruptcies as "consumer cases" rather than "business cases".


Cases involving more than US$50 million in assets are almost always handled in federal bankruptcy court, and not in a state proceeding.


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:

Bankruptcy filings by businesses: Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States. ... Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. ...

  • 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. Chapter 12 refers to Chapter 12 of Title 11 of the United States Code, a chapter of the Bankruptcy Code. ... is the 273rd day of the year (274th in leap years) in the Gregorian calendar. ... Year 2003 (MMIII) was a common year starting on Wednesday (link displays 2003 calendar) of the Gregorian calendar. ...


Source: November 14, 2003 News Release, Administrative Office of the U.S. Courts. (PDF file)


2004 Statistics

Total bankruptcies:

Bankruptcy cases filed in federal courts fell 2.6 percent in fiscal year 2004 according to the Administrative Office of the U.S. Courts. During the 12-month period ending September 30, 2004, 1,618,987 bankruptcies were filed, down from the 1,661,996 bankruptcy cases filed in fiscal year 2003. Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of 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. ...


Source: December 3, 2004 News Release, Administrative Office of the U.S. Courts. (PDF file)


References

  1. ^ Delta and Northwest airlines both file for bankruptcy. Retrieved on November 17, 2005.
  2. ^ The night of the killer zombies. Economist.com (2002-12-12). Retrieved on 2006-08-05.
  3. ^ (January 24, 2007), "Small Firms Spurn Chapter 11", Wall Street Journal, page B6B
  4. ^ (January 24, 2007), "Small Firms Spurn Chapter 11", Wall Street Journal, page B6B

17 November is also the name of a Marxist group in Greece, coinciding with the anniversary of the Athens Polytechnic uprising. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... For the Manfred Mann album, see 2006 (album). ... August 5 is the 217th day of the year in the Gregorian calendar (218th in leap years), with 148 days remaining. ...

See also

Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of 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. ... Administration is a procedure under the insolvency laws of a number of common law jurisdictions which functions as a rescue mechanism for insolvent companies and allows them to carry on running their business. ...

References

  1. ^ Delta and Northwest airlines both file for bankruptcy. Retrieved on November 17, 2005.
  2. ^ The night of the killer zombies. Economist.com (2002-12-12). Retrieved on 2006-08-05.
  3. ^ (January 24, 2007), "Small Firms Spurn Chapter 11", Wall Street Journal, page B6B
  4. ^ (January 24, 2007), "Small Firms Spurn Chapter 11", Wall Street Journal, page B6B

17 November is also the name of a Marxist group in Greece, coinciding with the anniversary of the Athens Polytechnic uprising. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... For the Manfred Mann album, see 2006 (album). ... August 5 is the 217th day of the year in the Gregorian calendar (218th in leap years), with 148 days remaining. ...

External links


  Results from FactBites:
 
Chapter 11, Title 11, United States Code - Wikipedia, the free encyclopedia (974 words)
Chapter 11 of the United States 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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