Make Sure You Understand Chapter 11 Purpose and Usage

To the general bankruptcy public, Chapter 11 filings will not be a major concern. Though technically possible for individuals, filing for Chapter 11 is much more common for corporate entities. Thus, unless they are business executives or sole proprietors, Chapter 11 filings will fall outside the realm of interest for most people.

Still, in terms of absolute incidents of filing for Chapter 11, over 10,000 petitions for reorganization are filed in the United States per year, which is a significant and fairly high amount. Therefore, it can be said that Chapter 11 bankruptcy has a real function in the American economy.

Some notes on the prominence and purpose of Chapter 11 filings today:

As with other forms of bankruptcy, filing for Chapter 11 can be at least in part defined by what it is not. In contrast with Chapter 7 bankruptcy, Chapter 11 seeks a reorganization rather than liquidaton of assets. Then again, it may be a creditor or creditors who wind up filing for Chapter 11 bankruptcy on behalf of their debtor. This is not merely a magnanimous gesture on creditors' part, though.

As voluntary Chapter 11 filings are usually sought to put a hold on the the demands of lenders, compulsory petitions are essentially a means to an end. That is, they are in response to a claim for monies owed to creditors that heretofore have gone unanswered. In filing for Chapter 11 then, the goal of creditors is to reach an equitable solution for the return of as much of their loaned funds as possible.

Regardless of whoever makes the initial request, Chapter 11 filings are designed to allow a business to keep running while it and its debt are reorganized. Of course, in cases of questionable leadership, the permission of companies to remain in action, often with little to no punishment for the offending officers, is reasonably questionable in its own right. Nonetheless, sometimes filing for Chapter 11 may be a saving grace to employees and stockholders alike. For instance, Chapter 11 proceedings may be used to transfer ownership to a new, more capable owner, in the process saving jobs. Reorganization may also be worthwhile in maximizing a company's value prior to the sale of its parts.

NEXT: Must Consider Reorganization or Rehabilitation Before Filing For Chapter 11