Ask a group of individuals to define bankruptcy and you're likely to get some pretty surprising answers. Many people see it as a "get out of jail free card" that allows them to rack up insurmountable debts and then have them simply wiped away. In reality that's not at all what bankruptcy is. To help you better understand the concept behind bankruptcy, and chapter 11 bankruptcy protection in particular, we'll take the next several paragraphs to explain a few things about this subject that many people don't know.
We'll begin with the fact that there are six different types of bankruptcy, each with its own set of rules and guidelines. Chapter 11 bankruptcy is designed for businesses or individuals who wish to reorganize their finances and eventually repay all outstanding debt. It is the most common form of bankruptcy among American corporations because it allows them to continue operating throughout the protection period.
Roots of U.S. Bankruptcy Law
U.S. bankruptcy law is based on the British common law which allows an individual or business at least a minimum of protection from creditors in the case of financial insolvency. Under British common law the principle was not to allow individuals to simply discharged debts at a whim; rather, it was intended as a tool to protect consumers and businesses from harassment and threats while they work on a plan to repay debts. Being that the vast majority of the foundational laws of our country were based on British common law, the federal code includes bankruptcy provisions.
Under the authority of the Constitution, the U.S. Congress has jurisdiction in creating a bankruptcy legislation. The first such legislation was written in the 1800s and has been revised several times since then. Chapter 11 bankruptcy protection is a part of that law and pertains mainly to corporations, LLCs, and partnerships.
Protection Is the Point of Chapter 11
The purpose behind the Chapter 11 bankruptcy is to protect not only an individual or business, but also the personal assets of all company officers. This protection basically says to creditors that they must cease all collection efforts on debts covered by the bankruptcy proceeding. They must stop sending letters, making phone calls, and demanding payment. They also cannot foreclose on, or seize the property of the business or individual engaged in a bankruptcy proceeding.
By protecting those types of assets a business is more likely to continue operating during the reorganization process. This is a great tool for businesses who don't necessarily want to close, but just need some help while they get themselves back on firm financial footing. This protection is also valuable for individuals and sole proprietors who have valuable assets that need to be protected. However, because of the nature of Chapter 11 bankruptcy protection most private individuals who wish to reorganize choose chapter 13 instead.
Emerging from Chapter 11 Bankruptcy
If a company develops a proper reorganization plan there is no reason why it cannot reemerge 3 to 5 years down the road. That, in fact, is the goal behind bankruptcy protection. Courts would rather see a business emerge from bankruptcy and move on to a more successful future then see it close altogether. Emerging businesses continue to pay taxes, employ individuals, contribute to local economies, and provide the goods and services Americans need.
It is generally accepted that a company is stronger financially when it emerges from bankruptcy. If all has gone according to the court approved plan, all qualified debts have been settled, cash flow has been improved, and business managers are much more capable of managing a company's finances. Unfortunately, there are cases where a company or individual does not emerge from Chapter 11, resulting in the liquidation of assets in order to satisfy debtors.
The key to understanding the bankruptcy process is the word "protection." U.S bankruptcy court is unequivocal in its stance that declaring bankruptcy should always be a last resort. They also make no bones about making it clear that bankruptcy law is a firm action in order to allow you to regain control of your finances. It is not meant simply as a way to discharged debts so that individuals and businesses don't have to live up to their financial responsibilities.