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What is Chapter 11 Bankruptcy

Each state has its own way of handling bankruptcies and has their own provisions. This is why it is important to visit with a local legal professional who can help you come to an understanding of the laws and guidelines concerning bankruptcies. For those who live inLivingston,New Jersey then they should contact a bankruptcy lawyer in NJ. Most of the differences between states have to do with limits pertaining to debts and income levels which have to be met in order to be eligible to file any particular chapter. Chapter 11 is a type of bankruptcy which is filed by a company when their revenues over the long term are likely to be much higher than the value were they to liquidate assets. This ensures their creditors that they will get more money back by allowing the company to reorganize and create a payment plan. In these cases the companies becomes a “debtor in possession” and maintains the ownership and control of their assets and are allowed to continue the regular operations of the business.

What happens when a company files Chapter 11 bankruptcy?

When a company declares a Chapter 11 bankruptcy they will have to disclose all of their assets. They must also list every one of the debts that they are seeking protection from. The disclosure allows the creditors the “right to question the debtor.” During the process the creditors will meet with the debtors. This disclosure statement must provide enough information for creditors to be able to determine whether it is reasonable for the company to reorganize and be successful. The disclosure statement is the first step and the court will have to approve it before the bankruptcy can proceed.

Confirmation and Post Confirmation

Once the court approves the disclosure the debtor will create and propose a reorganization plan and present it to creditors who will vote on the plan. The judge will have to approve the plan and all of the creditors in all of the impaired classes will also have to approve the plan. Most creditors will be in the impaired class which means that they will recoup only half of what they were owed. Company stockholders will likely vote on the reorganization plan but they do not carry as much weight as the court or the creditors. In cases where they vote down a plan, the court and creditors may go ahead and approve it. After the plan is confirmed then the terms of the plan will be carried out. Usually the reorganization plan will include the appointment of a “plan agent” who is a third party who will make sure the plan is executed. For instance, if the plan provides for $50,000 to be paid to the creditors each month, the agent would take care of all the logistics of the payments. The plan might also contain information pertaining to how the business (or individual) will operate in order to provide the money for the creditors for the length of the plan which can last for several years.

Period of Reorganization

While the company is in the period of reorganization, the stocks are basically worthless. But when the company works its way out of Chapter 11 and they are able to operate normally once again, their stocks will again be able to increase in value. There are some situations where a bond holder can recoup a portion of bonds’ face value as a part of reorganization. If a debtor fails to properly execute the reorganization plan, there can be several serious consequences. A trustee might be appointed. In the event that the company does not seem to be able to follow through with the repayment plan then the Chapter 11 can be converted to a Chapter 7. But in this case, it means the end of the company.

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