Chapter 11, Title 11, United States Code

From ArticleWorld

The chapter of the United States bankruptcy code that governs the process of reorganization is Chapter 11, Title 11, of the United States Code. The bankruptcy code itself is Title 11, with reorganization being covered in Chapter 11.

Definition

When a business decides that it is unable to service its debt, or pay its creditors, it can file (or be forced to file) with a federal bankruptcy court for bankruptcy protection, under either Chapter 7 or Chapter 11. A Chapter 7 filing means that the business intends to sell off all its assets, distribute the proceeds to its creditors, and then discontinue operations. A Chapter 11 filing is an attempt to stay in business while a bankruptcy court supervises the reorganization of the company's debt obligations.

The process

Once Chapter 11 is filed, the company can emerge from bankruptcy within a few months, or within several years, depending on the size, and complexity, of the bankruptcy. All debtors filing Chapter 11 cases are required to propose a plan of reorganization. If the debtor does not make a proposal, the court may consider proposals submitted by creditors. If no plan of reorganization is approved by the court, then the court may either convert the case to a liquidation under Chapter 7, or the case may be dismissed, resulting in a return to the companies previous situation.

Problems

One criticism is that a company undergoing Chapter 11 bankruptcy, is basically operating under the protection of the court until it emerges. In some cases, such as in the airline industry, it can give the bankrupt company a great advantage over its competitors. Another concern is that bankruptcy is too easy. Some see it as a needless escape for failing companies, and poorly managed businesses. These critics note that European bankruptcy laws are much less lenient.