Chapter 11 bankruptcy is not as famous or used as often as a Chapter 13 or 7. Most people are unaware of the provisions of this law and find it to be overly complicated. The truth, though, is that, if applied correctly, it can do a lot for a business. Here are a few things that you should keep in mind when considering filing for a chapter 13; first consider a chapter 11.
Chapter 11 bankruptcy
Take the state of California for example, in the year 2014, about 20,379 cases of bankruptcy were filed. Of them, 16,652 were Chapter 7 and 3,628 were Chapter 13, only 84 Chapter 11 cases were filed. That amounts to about 0.5% of all bankruptcy cases. Why this discrepancy?
Chapter 11 is normally used by businesses, few individuals also apply, but it is rare. Creditors prefer a Chapter 7 as they will get paid immediately, debtors prefer chapter 13 as it gives them an option to keep their assets. In some cases, a chapter 13 is not allowed by the court as they might have too much debt and the person applying might have too much disposable income to want to go in for a chapter 7. That is where a chapter 11 comes to play.
Chapter 11 is a reorganization bankruptcy, so the business filing will have to have a repayment plan in place. Debt reduction is one of the main highlights where companies have to let go quite a bit of debt in return for a restructuring plan that works for both parties. Penn Virginia, for example, was able to reduce debt by over $1 billion. While not many organizations rake up that level of debt, it still can work well for businesses that owe way too much. The bankruptcy court will decide on whether or not to approve the restructuring plan after which a good portion of the debt will be discharged.