If Chapter 13 Bankruptcy is intended to provide individual debtors with a way to pay off their financial obligations while protecting their properties from foreclosure, then Chapter 11 of the Bankruptcy Code is the business counterpart of the law. Essentially, in a Chapter 11 Bankruptcy, organizations are forced to undergo some form of financial reorganization. This is done in order to provide them with a way to meet their financial obligations by allowing them to continue corporate operation while pursuing more affordable repayment plans.
Basically, bankruptcy laws are intended to protect both the debtor and the creditor. This is because by giving the debtor ways to stay afloat while repaying their financial obligations, they continue to contribute to economic growth. At the same time, creditors are not forced to classify these financial obligations as bad debts and will still be able to minimize losses.
The Chapter 11 Bankruptcy safeguards the economy as a whole. Theoretically, as long as businesses are allowed to operate and generate revenues, money will be coursed into the economy, jobs will be protected, and creditors will eventually be able to recoup their money in due time. It is a possibility that companies may be forced to sell some of their assets to settle some of their financial obligations.
When the amount raised is not enough, the business inevitably will close down which results in unemployment, loss of revenue, and other negative effects. By enforcing the Chapter 11 Bankruptcy and initiating reorganization, the business, the workers, and the creditors all gain something positive. It is also possible that company management may opt for a Chapter 11 Bankruptcy more for political reasons rather than financial ones.
Other important details about Chapter 11 Bankruptcy include:
- Basically any type of business is qualified to file for a Chapter 11 Bankruptcy. This means regardless of whether it is a sole proprietorship, partnership, or corporation, if there are financial obligations that cannot be met on time, a Chapter 11 Bankruptcy filing remains a viable option. There is a possibility though depending on the business structure that a company may file for Chapter 11 Bankruptcy, while some of the owners may file for a Chapter 13 Bankruptcy separately.
- It must be remembered that a corporation is made up mostly of stockholders which are separate entities from the business itself. This means that when a corporation files for a Chapter 11 Bankruptcy, the personal properties of the stockholders will not be at risk or pulled into the process. It is a different issue altogether if the value of the company stock declines because of the filing. In this instance, the assets of the stockholders are directly affected because of the loss of potential profit from their investment.
- The situation is different when a sole proprietorship files for a Chapter 11 Bankruptcy. Essentially, in a sole proprietorship, the business and personal assets of the owners are treated in the same manner. To illustrate, let’s say that the need to sell off assets arises, in this context, there will be no distinction between the assets of the owner and the assets of the business. Everything can be sold or turned over to the creditor regardless what the ownership papers state.
- When it comes to a partnership, treatment of assets is similar to that of sole proprietorship in the context of a Chapter 11 Bankruptcy filing. This means that the personal assets or properties of all partners are declared as assets and properties of the business. In this context, when a partnership files for bankruptcy, there is a possibility that the personal properties of the partners may be used to settle financial obligations of the business. Individual partners however may file for personal bankruptcy at their own discretion to protect some of their personal assets.
- When a company files for a Chapter 11 Bankruptcy under United States law, the upper management of the company can continue to remain in-charge of the daily operation of the company even after the filing. This is in contrast to the business bankruptcy law practiced in Europe for example, where the upper management teams of the company that filed for bankruptcy are usually fired or replaced with more competent personnel after the filing.
- There are some companies that fall under the exceptions and are not allowed to file for a Chapter 11 Bankruptcy. Some of these types of companies include utilities, insurance companies, and some conglomerates. Since companies under these types of business classifications are not allowed to file for a Chapter 11 Bankruptcy, they are mostly forced to redistribute or reallocate most of their funds to their creditors based on prevailing laws. In some instances, properties are either liquidated or directly assigned to the creditor as a form of payment for the financial obligations. Because of the urgency of some of these types of businesses, there are instances wherein the federal government gets directly involved in the bankruptcy cases. In general, Chapter 11 Bankruptcy falls under the functional jurisdiction of the state, but, it must be remembered that every state implements its own set or requirements and may interpret the provisions differently.
The majority of the provisions covering the Chapter 11 of the Bankruptcy Code is focused on the determination of which assets are actually exempted by the law. It is legal for partnerships or parent companies to liquidate assets to shield them from being turned over to creditors. Some companies may even go to the extent of hiding their assets within the business structure of other companies that they have an internal agreement with, in the same manner that businesses are not prohibited from moving certain assets offshore to protect them from creditors. Overall, Chapter 11 Bankruptcy is considered by many sectors lax, but the intent of protecting employers, employees, creditors, and the economy is clear.