Chapter 11 definition

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What is Chapter 11?

Chapter 11 is a bankruptcy proceeding in which an entity can reorganize its financial situation while under court protection, after which it can continue in operation. A business typically seeks Chapter 11 protection when it cannot meet its ongoing obligations on a timely basis and is unable to restructure them via direct negotiations with lenders and creditors. During the court proceedings, the existing management team may be allowed to continue running the business. However, in cases of gross negligence, the court may appoint a trustee who is empowered to run the business. The business is given the first chance to propose a plan of reorganization. If the business does not do so or the plan is not approved by creditors or the court, then the creditors may propose a reorganization plan.

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Advantages of Chapter 11

There are several advantages to entering Chapter 11 bankruptcy protection, which are as follows:

  • Reduced debt level. Chapter 11 proceedings allow a failing business to restructure its debts and survive.

  • Reduced obligations. Chapter 11 allows a business to restructure onerous contracts, allowing it to avoid significant long-term obligations.

  • Continued employment. Chapter 11 can be a significant boon for a company’s employees, who might otherwise have a difficult time finding new employment.

  • Continued supplier business. Chapter 11 is a benefit for a company’s suppliers, who might otherwise permanently lose the orders that the firm had been placing with them.