Chapter 11 bankruptcy is usually filed when a company runs into trouble and can no longer meet its obligations to their creditors. Under Chapter 11, the debtor business continues to run the business in order to implement a reorganization and payment plan as approved by the bankruptcy court.
Unless the company has no prospect of future revenues (i.e. there is no demand for the product or service), Chapter 11 is better than Chapter 7 because creditors can potentially be paid more if the company continues to operate and generate income. In most cases, future revenues have a higher yield than whatever the company can realize by simply liquidating its assets.
The main goal of the bankruptcy court is to assist the debtor business to pay off the debts as completely as possible. Under Chapter 11, the debtor business, which is now the debtor in possession, is still in charge of operations but must consult with the courts for any major business decision. Under Chapter 7, the funds generated from the liquidation of the assets are distributed to secured and unsecured creditors first, and any remaining amounts distributed among shareholders.
Under Chapter 11, since the business is still operational, shareholders retain some value in their stock and can choose to trade it over-the-counter (OTC) or keep it until the company is in better shape. In some cases, the reorganization was so successful that the stock value rose higher than it had ever been. Those who kept their stocks or bought low in the OTC market may actually be able to realize more profit than if the company had not filed Chapter 11 bankruptcy.
No company wants to be in a position of weakness, and filing for Chapter 11 may sound like total failure. However in many cases, going bankrupt may be the best thing that ever happened to a company. Talk with a bankruptcy lawyer to gain a better understanding of filing for Chapter 11 bankruptcy and what it entails.Read More