What is Chapter 11

by Investing School on August 11, 2010

Although it may sometimes be bandied about as such, “Chapter 11” is not really the only form of bankruptcy. Rather, Chapter 11 is an actually a chapter of the United States Bankruptcy Code, which allows the reorganization of an entity under national law. The most common users of Chapter 11 are corporations, but it is also available to individuals and to smaller businesses, as well.

Chapter 11 comes into effect in a situation where a business cannot manage its debt (or make payment to its creditors). When this happens, the business can go to the federal bankruptcy court and request protection under Chapter 11 of the aforementioned code.

In Chapter 11, the business owner (and debtor) is usually able to stay in control of the business, although the bankruptcy court has oversight of their activities. (Note: this is in stark contrast to Chapter 7, in which the bankrupt business must stop all of its operations, while a trustee sells all assets and divides the revenue among the creditors.) Only the court can make a final determination as to whether or not a company is eligible for Chapter 11 bankruptcy protection.

In most cases Chapter 11 allows up to 120 days for a company to complete its reorganization. Confirmation and approval of the company’s reorganization plan is also a requirement, not only by the bankruptcy court, but also by the creditors. Similar programs for bankruptcy are also in effect in foreign countries, such as the United Kingdom, New Zealand and Australia.

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