What is Chapter 11 Bankruptcy?

Copyright (c) 2013 Eli Gali

With Detroit's recent and very public record-breaking municipal bankruptcy filing, a lot of people
are wondering what types of bankruptcies may be applicable to them if they have a financially
distressed corporation, partnership or limited liability company. This article will explore the
intricacies of a Chapter 11 bankruptcy.

Although Detroit is entering a Chapter 9 bankruptcy, Chapter 11 bankruptcies are usually the ones
that are attracting all of the attention when they happen. Back during the financial crisis in
2008 and 2009, several very large corporations fell victim to the downturn in the economy and
needed to enter Chapter 11 bankruptcy. Chrysler saw sales decline in 2008 and filed on April 30,
2009 with nearly $40 billion in assets. GM, like Chrysler, had to go through a bankruptcy on June
1, 2009 with $91 billion in assets. The fourth largest investment bank in the United States,
Lehman Brothers, fell on Sept. 15, 2008 with $691 billion in assets.

Chapter 11 bankruptcies need to be filed in bankruptcy court and are usually voluntary in nature.
Sometimes, creditors will force a defaulting debtor into an involuntary Chapter 11 if they believe
that it is in their best interest. As was mentioned previously, mostly corporations, partnerships
and limited liability companies enter Chapter 11. Individuals that do not have too much debt or
income usually file under Chapter 7 or 13 in order to save time and money. Chapter 11 bankruptcies
can take from six months to two years before they conclude.

After a company has filed for bankruptcy, then the court makes all major decisions for the
company from that point forward. The court is now in charge of most of the company's operations
and must grant any sales of the company's assets, cancelling of any leases, terminating or
increasing business endeavors, signing of contracts and the payment of any lawyers or other
business professionals. Creditors may be for or against any of the court's actions and if
necessary, may provide insight to the court on how it should proceed with certain items. Unsecured
creditors must form a committee that may grant them similar input with the court.

Typically, a debtor has four months after filing in order to propose a business restructuring
plan. If the court decides that the company's reorganization plan has merit, it may extend the
debtor's timeline to file Chapter 11 for an additional 18 months. Usually, most restructuring
plans entail downsizing the business in order to minimize expenses and begin to satisfy the
company debts, although sometimes a complete termination of operations and a sale of company's
assets is the only course of action. Under the restructuring plan, the company must prove that the
plan is feasible, has been proposed in good faith, be in the best interest of the creditors and be
fair and equitable. 

All situations are different for each company, but the ultimate goal for a company wishing to
stay in business is to have most, if not all, of the company's creditors financially satisfied
while at the same time continuing their business operations. Sometimes companies succeed and come
out of Chapter 11 bankruptcy with a 'slimmed-down' version of itself and sometimes meeting the
'best interests' of the creditors forces them to shut down completely. Studies show that only
about 10 to 15 percent of Chapter 11 situations result in a successful restructuring.

To learn more about the Chapter 11 restructuring process, contact a qualified a corporate
bankruptcy law attorney.
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Eric Terry Law ("ET Law") provides high caliber business related legal services in a broad range
of areas regarding corporate bankruptcy, general counsel and debtor and creditor rights. Eric
Terry is a lawyer that serves many clients in San Antonio, Austin, Houston and Dallas, Texas.
http://ericterrylaw.com

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