Saturday, January 21, 2023 1:26:22 AM
Chapter 11 bankruptcy
Chapter 11 bankruptcy is the formal process that allows debtors and creditors to resolve the problem of the debtor’s financial shortcomings through a reorganization plan; see Tamir v. United States Trustee. Accordingly, the central goal of chapter 11 is to create a viable economic entity by reorganizing the debtor’s debt structure. Unlike chapter 7, chapter 11 is not a liquidation of the debtor’s assets. Rather, it is a reorganization of existing assets, principally as debt. The confirmed chapter 11 plan becomes a contract between the debtor and creditors, governing their rights and obligations; see In re Nylon Net Company.
When a company can no longer pay its debts, it generally creates a relationship between two stakeholders–the debtor and creditors. The debtor seeks relief from the debt they cannot repay, while the creditors seek to recollect their debts, quickly and efficiently. Through the “chapters” in the Bankruptcy Code, Congress created the rules governing the relationship between creditors and the debtor during bankruptcy in order to systematically, effectively, and efficiently satisfy the often countervailing interests of each side.
The premise behind a chapter 11 reorganization is that a debtor is more valuable as an operating entity than in liquidation (i.e., through a chapter 7 bankruptcy). Hence, chapter 11 bankruptcy is generally chosen when the continuation of a debtor’s business generates more value than a closure and piecemeal sale of its assets. This often occurs when the debtor’s financial troubles are a product of temporary issues, such as low cash flow and diminishing demand. A bankruptcy judge will confirm a chapter 11 plan only when creditors are satisfied that they will receive at least as much as they would under a liquidation.
https://www.law.cornell.edu/wex/chapter_11_bankruptcy
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