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Chapter 11 Bankruptcy is not liquidation; it is reorganization.
Once Chapter 11 is filed, the company may "emerge"
from bankruptcy within a few months or within several years, depending
on the size and complexity of the bankruptcy. All debtors filing
Chapter 11 cases are required to propose a plan of reorganization: if
the debtor fails to make a proposal, the court may consider proposals
from creditors. If no plan of reorganization is approved by the court
(this process is called confirmation) then the court may either
convert the case to a liquidation under Chapter 7 or, if in the best
interests of the creditors and the estate, the case may be dismissed
resulting into a return to the status quo before bankruptcy.
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Individual Chapter 11: Individuals may also file Chapter 11, but due to the complexity and
expense of the proceeding, this option is rarely chosen by debtors who
are eligible for Chapter 7 or 13 relief.
Typical debts and contracts cancelled in a Chapter 11 bankruptcy
include unsecured loans and, if canceling them would be financially
favorable to the company, union contracts, supply or operating
contracts (with both vendors and customers) and long-term real estate
leases.
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Business Chapter 11
All creditors who register with the court can be heard by the
court, which is responsible for determining whether the plan of
reorganization complies with the purposes of the bankruptcy law and
provides for fair and equitable treatment of all parties in interest.
Priority of claims is determined by Section 507 of the Bankruptcy
Code, but as a general rule secured creditors, such as some banks and
bondholders, have a higher-priority claim on the proceeds of the sale
of corporate assets than unsecured creditors, such as vendors who have
not been paid for products they previously delivered to the company
(and who do not have any collateral for their claim). Once a business
files for Chapter 11 bankruptcy, the creditors are not allowed to
attempt to collect previously incurred debts except through the
bankruptcy court.
Under some circumstances, the creditors or the US
TRUSTEE may ask the court either to convert the case to a liquidation
under Chapter 7, or to appoint a trustee to manage the debtor's
business. The court will grant a motion to convert to Chapter 7 or
appoint a trustee if either of these actions is in the best interest
of all creditors (appointment of a trustee also requires some
wrongdoing or gross mismanagement on the part of existing management,
and is relatively rare).
Over the years, some companies, large (Worldcom) and small, seem to
use the bankruptcy laws as part of their strategic planning. Who gets
hurt in the end are the workers, vendors, suppliers, landlords and the
lost goes on. Until recently, "poor management" has not been
a criminal offense, unless proven that a company (or those responsible
for the money) have acted recklessly and for their own use.
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