REORGANIZATION UNDER CHAPTER 11 OF THE U.S. BANKRUPTCY CODE

Thanh N
07.08.14 01:49 AM Comment(s)

When a business does not perform as expected, the amount of debt it carries might increase and, in the process, may force a business owner to seek bankruptcy. In most business bankruptcy cases, a corporation or a partnership in debt seeks reorganization under Chapter 11 of the United States Bankruptcy Code with the hope of keeping the business alive and steadily repaying the accumulated debt.

In Maryland, to file for reorganization under Chapter 11, a business owner has to approach the United States Bankruptcy Court for the District of Maryland, which is one of the 94 federal judicial districts under the U.S. Court System. In the event of a Chapter 11 reorganization plea, a company carries out business as usual, but with all significant business-related decisions approved by the Bankruptcy Court.

According to the law, a company may continue trading stocks and bonds during a bankruptcy filing and may continue to trade shares in the stock exchange. Usually though, the listing standards are stringent enough to prevent the participation of such companies. However, these companies may continue to trade shares on the Over-The-Counter Bulletin Board or Pink Sheets.

Many business owners should know how Chapter 11 bankruptcy works relative to a Chapter 7 bankruptcy filing. The basic difference between the two is that while Chapter 11 allows a company to continue business and seek debt relief simultaneously, a Chapter 7 bankruptcy filing immediately stops all operations of a business.

Once a company files for bankruptcy protection, the U.S. Trustee appoints one or more committees, which represent the interests of the stockholders and creditors and help develop a reorganization plan that will attempt to get the company out of debt. This plan must be accepted by creditors, stockholders and bondholders and must be vetted by the bankruptcy court.

Upon finalization of the plan, the committees and the company work in tandem to relieve the company from repaying a significant part of its total debt amount and in the process helps the company regain solid footing. However, a business reorganization plan that a committee or a company wishes to implement must be vetted by the bank for compliance with the U.S. Bankruptcy Code.

Source: SEC.gov, “Corporate Bankruptcy,” Aug. 3, 2014