The Basics of Chapter 11 Bankruptcy
The courts refer to Chapter 11 bankruptcy as corporate bankruptcy
because it is typically reserved for businesses and large
corporations that have exhausted other options for repaying their
creditors. In this type of situation, a business or corporation
decides to allow the courts to oversee the reorganization of its
debts and assets. A bankruptcy court trustee is often appointed to
the case and is instrumental in reorganizing the assets of the
debtor in order to repay creditors more efficiently. Many times, the
company is still allowed to stay in business while their creditors
are repaid, but this is not always the case.
Chapter 11 bankruptcy for businesses is much like personal
bankruptcy, but the specifics differ slightly. While individuals can
only file for bankruptcy on a voluntary basis, sometimes a
corporation's creditors force them into it. Once a business enters
into bankruptcy protection, its finances are evaluated and then the
court decides how the business will repay its creditors. Oftentimes,
corporate bankruptcy will allow the business to operate so it can
still continue creating profits that go to repay debts and the
liquidation of its assets is kept to a minimum.
When a business files for corporate bankruptcy in which its debts
are greater than its assets, the stockholders receive nothing after
the bankruptcy is completed. Essentially, they lose all rights that
they had to the company and its assets. As a result, the creditors
take control of the company in order to help it retrieve the
monetary losses incurred by extending credit to it. This is also
done to help save the jobs that the corporation provides and to help
retain the profit-making capabilities of the business.
Although it is a good idea for a failing business, bankruptcy has
many critics who feel that it is harmful to allow corporations to
file for the court's protection from its creditors. Many critics say
that it is unfair for a company to continue to operate once it has
filed for bankruptcy. The reason is that the company can cease
paying its debts and use that money for improving the business. As a
result, the company has an advantage over its competitors because it
has more money to unduly put into acquiring more customers, planning
better products, and much more. Others say that Chapter 11
bankruptcy only perpetuates the problem of bad financial management
in the upper tiers of the corporation's executives. Filing for
bankruptcy protection only adds to this problem by maintaining the
practice of bad financial management.
The reasons for Chapter 11 bankruptcy vary among the different
corporations in need of the services that it provides. Whether or
not it is good for the economy, it is still a practice that does not
go unused. This is proven by recent occurrences, such as K-Mart and
WorldCom, in which major corporations filed for business bankruptcy
protection in order to have their debts reorganized while remaining
in business and creating revenue. While it may provide unfair
advantages and a continuing practice of financial mismanagement, it
is sometimes a necessary method to save some corporations from a
complete shutdown.
