Chapter 11 Bankruptcy - USA Laws and Definitions Online

Chapter 11 bankruptcy law and advice.

Your business is going under, and you're thinking of possible solutions - you've heard of Chapter 11 bankruptcy, but what exactly does it mean? Chapter 11 bankruptcy is primarily used by businesses - corporations, partnerships, and sole proprietorships - that need to erase overwhelming debt, leases and contracts.

Businesses that file Chapter 11 are allowed to remain in operation while a bankruptcy court and court-appointed trustees supervise an overall inner reorganization. By shifting around operations, the court tries to determine and erase any financial sinkholes that may have contributed to the business's debt. By definition, Chapter 11 differs from the other forms of bankruptcy law as it stands as a measure of protection against the liquidation bankruptcy of filing Chapter 7, and the repayment scheme of Chapter 13.

In any business bankruptcy, the court appoints committees to speak for the creditors and the stockholders as they work to clear the business of debt. The committees must then put together a plan of reorganization for the business. This plan is reviewed by the creditors and stockholders, and should be accepted before the court makes a decision on whether to approve it or not. It is up to the court, however, to make a final decision on the situation, and the judge has the ability to approve the plan without the agreement of the creditors or stockholders.

Chapter 11 bankruptcy differs slightly depending on the type of business in discussion.

A corporation exists alone from its stockholders, and so the personal assets of the stockholders are not involved the bankruptcy case. A partnership, too, stands separately from the partners, but the partners may be able to use their personal assets in order to pay off their creditors or else have to investigate personal protection from bankruptcy. A sole proprietorship, however, does not separate the business from its owner, and so the owner's personal assets are at risk for bankruptcy.

The court may also release the business from certain types of debt. Unsecured loans are often the first to go, before examining any real estate and union labor contracts to decide if their release would be beneficial to the company. If, however, the business's debts outweigh its assets, then the stockholders end up with nothing and the newly restructured business is turned over to its creditors, who will use any profit from the business to make up its original financial losses.