Chapter 11 Bankruptcies for Business

By: Timothy McFarlin | Published: May 12th, 2010 | Category: Bankruptcy

A Chapter 11 bankruptcy, often referred to as a reorganization bankruptcy, is a popular bankruptcy option for private businesses.  Unlike other forms of bankruptcy, a Chapter 11 bankruptcy allows a business to reorganize their debts while maintaining the property necessary to run their business so that they may earn enough money to pay their debts under the supervision of the bankruptcy court.

In most cases, the owner of a business will be allowed to maintain operational control of their business unless their methods are ineffective or less than ethical.  In the case of bad management practices, a trustee may be assigned by the bankruptcy court to handle the management operations of the business.

A trustee has the authority to appoint a committee of up to twenty creditors who are seeking compensation for past debts from the financially struggling business.  This committee has the authority to negotiate reorganization terms with the debtor and to provide oversight of the activities of the debtor. 

In order for a person to be approved for a Chapter 11 bankruptcy, the debtors which they owe money to must confirm the reorganization plan presented by the debtor.  In the event that the debtors disagree with the reorganization plan to repay old debts, the debtor may request the bankruptcy court to compel the creditors to accept the reorganization plan if certain legal tests are met. 

Chapter 11 bankruptcies are notoriously flexible when compared to the other chapters of bankruptcy law, but success rates are relatively low for the debtor.  Few businesses are able to fully recover from a Chapter 11 bankruptcy because as soon as debts are settled, the oversight and direction offered by the trustees and the trustee appointed creditor committee ends. 

Due to the cost involved with Chapter 11 bankruptcies, this option is often reserved for large corporations and businesses.  One example of the type of company that would elect to pursue a chapter 11 bankruptcy is the financially struggling theme park.  In 2010, the Six Flags Magic Mountain theme park reorganized corporate debts under a Chapter 11 bankruptcy agreement.   

Anyone considering a bankruptcy should consult with a local bankruptcy attorney to determine which chapter of bankruptcy law would be most beneficial for a person’s individual financial situation.  While multiple bankruptcy options exist for consumers, not every choice will be the most beneficial.  A licensed and experienced attorney can offer bankruptcy guidance and preparation of necessary documents. 

Very rarely will an individual benefit from the terms of a Chapter 11 bankruptcy, but this does not mean that filing for Chapter 11 protection is not an option.  Individual consumers with millions of dollars of debt may benefit from debt reorganization under Chapter 11 of the U.S. Bankruptcy Code, but this will not apply to every consumer.  People considering a bankruptcy are reminded that not every bankruptcy is approved by the court, and it would be a waste of time for a consumer to file under the wrong chapter only to have their claim denied by the court.  Investing in the advice of a lawyer will help prevent a case being dismissed due to a lack of legal knowledge.

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