Chapter 11

What is Chapter 11?

Chapter 11 refers to the bankruptcy code that is used to provide corporate or partnership reorganizations. A Chapter 11 debtor proposes a plan for reorganization and promises to repay the debt over time. In the meantime, the debtor can continue to operate the business as usual.

Deeper definition

A Chapter 11 bankruptcy case begins with the filing of a petition in court. In almost all cases, Chapter 11 filings are voluntary. It was the debtor who took the initiative to seek bankruptcy relief.

Still, on occasion, creditors will band together to file an involuntary Chapter 11 to force a debtor to come up with a plan for repayment.

While individuals can file under Chapter 11 if they have too much debt to qualify for another type of bankruptcy protection, it is normally used by corporations, partnerships and limited liability companies.

The advantage of Chapter 11 is that it helps a business restructure its debts to meet those obligations while keeping the business afloat. General Motors, Macy’s, Kmart and United Airlines are among the thousands of corporations that have filed under Chapter 11 to keep their doors open. It takes from a few months to two years to complete a Chapter 11 case.

Chapter 11 example

When a company files for Chapter 11, employees are understandably anxious. It is important for them to know what is in store when the company files for Chapter 11 bankruptcy.

Potential layoffs. While it is not a sure thing, creditors often demand that management take action to reduce labor costs.

Wages. As long as employees continue in a company’s employ, their paychecks should not be interrupted. If they are laid off and the company owes them money, they become creditors and will be paid at some future date.

Unemployment. If employees are laid off following a Chapter 11 filing, they still are eligible for unemployment.

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