The Law Of Chapter 11 Bankruptcy

The world has gone, and is going, through massive economic upheavals which are having major economic consequences for many businesses the world over

. Many businesses have had to get rid of employees as they desperately try and cut costs during a period of falling sales and rising costs of credit.

The biggest problem faced by companies is often short term cash flow. This is where the company is basically sound, but is facing a few months of inability to meet it's payment commitments, be it to suppliers or to it's own staff in the form of wages.

This is enough to bankrupt many businesses that simply have no way to bridge the funding gap. This is where chapter 11 Bankruptcy comes in.

Chapter 11 bankruptcy is not a situation where all is lost and the company folds. Certainly, if the bankruptcy court trustee feels that the business has no future and its problems go well beyond cash flow, chapter 7 may be invoked and that really is the end of the line, but chapter 11 allows the company to continue trading under a legally binding repayment plan.

So, if the court decides that a business can trade profitably again, once debts are rescheduled, chapter 11 will be filed, giving creditors the maximum chance of getting paid in full.

Chapter 7 requires the liquidation of all assets, which means that if a company goes down this road, the business is effectively finished. Chapter 11 requires no sale of assets, indeed the assets are necessary to allow the company to continue trading, and in the court's eyes, to repay its creditors.

However, the personal wealth of the shareholders is not entirely secure; in that when a company files for bankruptcy this will often decrease the overall value of the company. It also does not mean that assets will not be sold.

Assets that the trustee deems are not essential to the business may have to be sold to raise cash so that a realistic repayment plan can be implemented. The main focus is always on ensuring that the creditors get paid.

Not all companies can file under chapter 11. Some are specifically excluded such as insurance companies and utilities. Chapter 11 varies from state to state, so rules differ depending on what part of the US the company is located.

One of the problems with chapter 11 and indeed any business filing for bankruptcy is the advent of globalised business. The problem is, despite the growing amount of case law to clarify the situation; it can be extremely difficult to identify what part of any large global corporation is subject to chapter 11 proceedings.

The fact is, it can be relatively easy for a company to hide assets within the structure of allied firms, and even move assets offshore to avoid liability altogether.

by: Bob Tremerituus

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