Important Aspects of Chapter 11 Bankruptcy Laws

Chapter 11 bankruptcy laws are designed to allow a company to continue its normal business operations while under extreme financial difficulty. While chapter 11 bankruptcy is not a form of personal bankruptcy, it is important to know what these laws mean, since chapter 11 is the type of bankruptcy you are most likely to hear talked about in the news, especially during difficult economic periods. Moreover, individuals do feel the effects of chapter 11 bankruptcy when they are either employed by a company that is filing for chapter 11 bankruptcy or when they have money invested in the stocks of a company that is filing chapter 11.

Chapter 11 bankruptcy cases are the most complex and expensive type of bankruptcy cases and are opened only as a last resort when a company faces totally unmanageable financial circumstances that might result from mismanagement or unforeseeable market changes. While time-consuming and difficult, chapter 11 protects a company as well as its employees and investors. A major advantage to companies under chapter 11 bankruptcy is that it shelters the company from lawsuit so that they have extra "breathing time" to reorganize their operations and assets without having to suffer additional loss from lawsuits. Major business decisions made by the company must be initially approved by the bankruptcy court, because it is a central goal of the bankruptcy court to work for the interest of each party involved and avoid additional risk.

The bankruptcy division of the U.S. Justice Department tries to work with the company and its creditors in order to establish a plan that will allow at least partial repayment of the company's outstanding debt. Secured creditors, such as banks, have the first priority in repayment, while unsecured debtors, such as suppliers, are given second priority. Stockholders are addressed last. A common solution to the financial difficulties of a company in chapter 11 bankruptcy is that they will be purchased and merged into another company. Compensation for the loss faced by investors in the company is sometimes offered through conversion of stocks in the old company into stock in the new company, even though this might not be of equal value. If a company is filing chapter 11 in relation to loss through fraud or other illegal activities, the Justice Department will seek to apply maximal legal penalties upon the company, and the company may be held to repayment obligations but prohibited to continue its operations entirely.


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