Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is a reorganization bankruptcy plan. While available to businesses and individuals, it is almost exclusive used for business to reorganize their debts and continue operations. When a business is unable to pay its creditors, its options are generally a chapter 7 liquidation, where the assets are sold and the money is paid to the creditors, or chapter 11, where the business continues operations with all its creditors put on hold, while management puts a proposal to reorganize the company to pay its debts. Some contracts may be canceled by the courts, if the company is publically traded, its stock is normally delisted, and if the business's proposal to restructure is accepted, the business operates according to the plan to resume operations.
In a chapter 11, the owners of the company (the stockholders) normally find their shares rendered worthless, and the creditors assume most of the ownership of the company. The company and the plan may reserve some share of the stock as an incentive for management to remain, and as part of a new contract with unions or other employees. Individuals that want to repay their debts and need more reasonable terms normally file under chapter 13, which is a more straight-forward and less costly form of reorganization. If you have assets that you are concerned with preserving, and you think that a chapter 11 bankruptcy is more advantageous, consider speaking with a bankruptcy attorney about your options and the costs of them.
Advantages to Chapter 11
Chapter 11 bankruptcy is seen as an option that saves jobs and may preserve value, by allowing the company to continue operations during the restructuring. While chapter 7 filings may allow continue employment while the company and creditors attempt to sell units of the company, it generally entails the business ceasing operations.
For the management of the company, chapter 11 gives them leverage with the creditors, who may be unwilling to restructure debts, and preserves their opportunity to continue as the management with the first right to propose restructing plans. Management may lose their existing stock options, stock ownership, or restricted shares, but may be able to recover my issuing retention shares to keep them around.
Drawbacks to Chapter 11
In a chapter 11 filing, the stockholders (owners) of the company usually see their shares rendered worthless. While the company is able to continue operations, the company has new ownership, and no benefit from the continued operations. Employees, particularly unionized ones, often see their contracts voided, and specialized employees that can't work in other fields without substantial pay cuts may see their salaries and benefits massively reduced.
Criticisms of Chapter 11
Critics point out the the biggest beneficiaries of chapter 11 are the managers whose behavior put the company into bankruptcy in the first place. In addition, in extremely competitive markets, the chapter 11 filing of a major player may give the newly reorganized company an advantage, as they are able to compete with the other companies without the debt. In fixed cost intensive businesses like the airline industry, a large portion of expenses is the interest expenses on the debts attached to assets such as the airplanes. Without having to make debt payments, the carriers operating under chapter 11 were able to reduce prices below their competition, expand routes, and otherwise operate at an advantage. This can cause the companies that were previously economically viable to become the losing companies, put at a structural disadvantage by the courts, and force the competitors into bankruptcy.
Critics suggest that chapter 11 should be reformed so that it is not a tool of management to preserve their jobs or a way for unhealthy companies to unfairly compete with healthy ones. Some suggested that the airline industry would have recovered if the unhealthy companies were forced to liquidate, rather than expand under court protection. A reduction is excess capacity would have caused price increases, helping the surviving carriers increase profitability.
