FAQ About Chapter 11 Bankruptcy

Unlike many other forms of bankruptcy, Chapter 11 is for businesses rather than individuals. It allows a corporation that has accumulated too much debt to restructure its financial affairs. Though in some cases Chapter 11 bankruptcy can save a business, in most cases it spells the end of a corporation. Creditors are repaid for any financial claims they may have through court-supervised sale of business assets, such as property and stocks.

Types

Any business, whether a corporation, Limited Liability Company (LLC), or sole proprietorship, can petition for Chapter 11 bankruptcy protection. However, virtually all sole proprietors, who are really self-employed individuals, opt to file personal Chapter 7 or Chapter 13 bankruptcy.

Significance

A court can deny a Chapter 11 bankruptcy to a business, especially if it really does not have any assets to sell. In these situations, a business Chapter 7 is ordered. Chapter 7 bankruptcy totally liquidates all debts and puts the company out of operation. This is especially common for small businesses.

Benefits

Perhaps the largest benefit of any personal or business bankruptcy case is the automatic stay law. When a bankruptcy petition is pending before the federal court, no creditor can legally contact a debtor. In Chapter 11, this is especially important because it prevents creditors from trying to place their claims ahead of others. It enables the court to determine with the debtor, free of pressure, how to best serve both the company and the debtors. Those in Chapter 11 bankruptcy cannot be sued or have assets seized during the process.

Stocks

It is important to note that during a Chapter 11 bankruptcy case, stocks are typically unavailable for sale through traditional exchanges such as NASDAQ or the New York Stock Exchange.

History

A number of major corporations have filed rather large Chapter 11 bankruptcies, the last two happening in 2008. Investment bank Lehman Brothers Holdings, Inc., filed Chapter 11 in New York in September 2008, while major bank Washington Mutual also filed a Chapter 11 bankruptcy petition in Delaware that same month. Texaco, Inc., did restructure successfully after a 1987 Chapter 11 case. Perhaps the most controversial Chapter 11 filing in United States history came from Enron Corp. in 2001. Enron did not survive Chapter 11, and many individual employees were dramatically affected through loss of retirement accounts.

Features

A bankruptcy judge can also release a business from contracts and leases under Chapter 11 protection. However, a bankruptcy trustee does become involved in the operation and financial affairs of any company trying to save its business by filing a Chapter 11 case.