Why would a company choose to file Chapter 11?
Chapter 11 is the option most companies prefer in bankruptcy. When a company chooses this option, revenues over the long term tend to be higher than they would have been had the company chosen to liquidate its assets.
What Is Chapter 11 Bankruptcy?
Chapter 11 is one method of reorganizing and restructuring a company. It allows a business owner to create a plan for repayment and/or to reorganize and restructure debts. Under Chapter 11, the company can continue its normal business dealings, like selling merchandise. However, a few activities are not possible. For example, the owner can’t expand the company, buy other companies or sell off major equipment without the approval of the court.
The Chapter 11 bankruptcy process takes place in several stages, as follows:
- To file Chapter 11, a company discloses all of its assets and lists all of its creditors.
- If the company has experienced gross mismanagement of the company or its funds, the court will appoint a trustee. This means the owner will no longer be in charge of the business.
- A creditors’ committee will negotiate payment options for the creditors. Sometimes this calls for a business to close stores, lay off workers, or renegotiate union contracts.
- Once a plan is in place, the shareholders vote on it, but the court may generally proceed even if they don't vote in favor.
- Then the bankruptcy is confirmed.
After this, if the creditor violates the terms of the reorganization plan, one of two things may happen. A trustee will be appointed or the Chapter 11 will convert to a Chapter 7, which means the end of the company.
Downsides to a Chapter 11 Filing
There are some reasons Chapter 11 may not be the best option. First, the owner could lose significant control of the company. Even if the owner remains in charge, other people will be overseeing his or her decisions. Second, bankruptcy takes a very long time, much longer than most people realize. Third, employees who believe the company is on shaky ground may leave. Finally, Chapter 11 bankruptcy is very expensive. Costs can range from $50,000 to $100,000 for attorney fees alone.