Chapter 11 Bankruptcy Definition
Similar to Chapter 13, but generally applicable to partnerships or corporations, Chapter 11 of the Bankruptcy Code is also known as a reorganization bankruptcy. Unlike Chapter 7, it indicates an attempt to continue operating a business while debt and contractual obligations are supervised by a bankruptcy court, with creditors receiving payments over a period of time. Although Chapter 11 usually involves a partnership or corporation, individuals can also use it.
Under the provisions of Chapter 11, a bankruptcy court can make it possible for a company to start again by granting full or part relief from the majority of its debts. When the bankruptcy process is completed, the company's stockholders may be left with nothing in relation to their investment, if the debts of the company exceed the assets. However, because the debtor is an entity, the personal assets of the stockholders, apart from that investment, are not at risk. If the case involves a partnership, however, a bankruptcy attorney will advise that when a partnership is a debtor, the personal assets of the partners may in some cases have to be used to pay creditors.
As far as the company's creditors are concerned, they may find themselves owning the newly organized company. This can happen, if it is more economically viable to cancel some debts and allow the company to continue operating under the ownership of its creditors rather than to sell its assets individually. In this situation, the creditors could eventually be compensated for the loss they have suffered if the new company achieves financial success.
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