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Chapter 11 Bankruptcy

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BKhome

Chapter 11 Bankruptcy
The Bankruptcy Code, codified under Title 11 of the United States Code, is the uniform law of bankruptcy for the whole country. The types of case bought under the Bankruptcy Code are traditionally identified by the chapter that describe them in the code. The chapter that has provisions for a business that wants to reorganize itself, is the eleventh.

Chapter 11 allows a business or an individual to propose a plan of reorganization and thus keep the business alive and to pay the creditors over a period of time. This is in contrast to Chapter 7 where the business is liquidated, creditors paid from the proceeds, and debtor discharged of his debts . In chapter 11, if the company's liabilities exceed its assets, then at the completion of bankruptcy reorganization the businesses owners may end up with nothing and the company's creditors may become the new owners of the business, in return for partial or full compensation for the credit they advanced to the business. Te reasoning behind this kind of reorganization is that a company may be worth more as a going concern than it's liquidated assets. This method may save jobs of the employees and assets of the company including intangible ones.

Process of Bankruptcy
Bankruptcy petition can be voluntary or involuntary. Involuntary petition can be filed by creditors who fulfill certain criteria stated in the law. Once a business files for bankruptcy it's creditors are not allowed to take any other collection actions. All creditors must register with the bankruptcy court to participate in the estate of the bankrupt business. Usually largest creditors forms a committee with the court's approval in order to look after their interest during implementation of the reorganization plan. Even after the petition is filed debtor will still keep possession of assets until a plan of reorganization is confirmed by the court. In chapter 11 a trustee is appointed only in small number of cases and the debtor now termed 'debtor in possession' will perform the functions that will usually come under the trustee in other chapters of the bankruptcy code. If the debtor fails to come up with a viable plan of reorganization that fulfills the standards set out in the Bankruptcy Code, court may allow the creditors to do so.

Due to the complexity and expense involved individuals rarely file under chapter 11. They may be better off filing under chapter 13 or 7 if possible. For non limited liability businesses like sole proprietorships or partnerships bankruptcy proceedings will involve both the assets of the business as well as the personal assets the owners, who may be forced to file for bankruptcy as individuals.. On confirmation of the reorganization plan, debtor is discharged from debts entered in to before the confirmation, and is bound to the new contractual obligations arising from the provisions of the plan and to the payments it entails.

Depending on the local court polices, when the reorganization is complete and the estate 'fully administered', a final degree closing the case is entered.

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