Chapter 11 Bankruptcy 101
With discussion of a Chapter 11 bankruptcy petition for General Motors happening more often, I thought it would be helpful to explain how a Chapter 11 bankruptcy works.
Chapter 11 refers to the specific chapter of the federal Bankruptcy Code that handles business reorganization. Once a business or corporation files a Chapter 11 bankruptcy petition, all of its debts and contractual obligations are frozen on the day of filing.
A trustee is appointed by the court to oversee the bankruptcy estate. The corporation continues on with its business under the supervision of the bankruptcy trustee. The bankruptcy filing business then divides its creditors into with different categories or classes; generally called secured, unsecured or priority creditors. Contracts may be kept with certain creditors, and rejected or renegotiated with others. Certain assets may be sold off or liquidated, other assets kept for the future reorganization business. A Plan of Reorganization if then proposed to the creditors and court.
Under a plan of reorganization, some classes of creditors may received 100% of their claim, and some classes creditors may receive little or nothing on their claim based upon the class of creditors they are in. The Plan of Reorganization is voted on by each individual class of creditors. If each class of creditors approves the plan, the plan is adopted. Alternatively, if the lowest class, the class receiving the poorest treatment, approves the plan, it also may be approved over objections of other classes. Once a Plan of Reorganization is approved, creditors are paid over time in accordance to the Plan of Reorganization.
By analogy, I would compare Chapter 11 bankruptcy reorganization to cutting the dead branches from a tree. If done properly, the tree is re-shaped and will survive. |
