Chapter 11 bankruptcy

In the recent global recession many banks and renowned companies applied for bankruptcy because it was hard to swallow the continuing loss. The stocks and the real estate nose dived. The gloom in the market reduced the sales and it resulted in huge loss to the business. In such circumstances, there was no other option for these companies but to seek bankruptcy. There are several ways of applying for bankruptcy. The most preferred course of bankruptcy application is to file it under Chapter 11 of the Act.

What is Chapter 11?

In the normal course, after drawing the balance sheet if the liabilities are more than the assets of the company, then the personal assets of the applicant may also be at risk and they may be used to clear the debts. But when application is filed under Chapter 11 by the corporate sector, partnership and the sole proprietorship conce
s, the personal assets are spared. This comes as a great relief to the applicant. Further, the company is allowed to continue in business so that it can make one more effort to revive the business and make an action plan to clear the debts. But normally individuals are not allowed to file bankruptcy under Chapter 11.

Exceptions:

Apart from the individuals, large business segments like the insurance companies are not allowed to file bankruptcy under Chapter 11. They have to follow a different procedure as set out in the relevant Act. In such cases, even the federal government would be a party.

Importance of Chapter 11:

Some financial analysts say that Chapter 11 is too liberal and can be misused. The aim of Chapter 11 is to give an opportunity to the business to revamp itself instead of closing down and putting the employees and the share holders in hardship. The government thinks that there is always an opportunity for the business to do well and grow. In some countries the authorities allow the company to change the top management of the company so that the new team could put the business on track. In such cases, care is taken to appoint a team which has the necessary experience and expertise in managing the business. Therefore these eligible sectors always file the bankruptcy application under Chapter 11.