Advantages and disadvantages of Chapter 11

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Updated: 4/13/2007 3:35 pm
Chapter Eleven is designed to help a business recover from financial distress. It allows the company to reorganize operations and continue to function while under supervision of the bankruptcy court. Congress enacted Chapter Eleven because it believed that a rehabilitated business is better for the economy than the unemployment and waste of assets that occur when a business goes under. While in Chapter Eleven reorganization, creditors must obey a court-ordered stay and refrain from taking action against the business. Unlike other forms of bankruptcy, under Chapter Eleven, the CREDITORS also have a right to file a plan of reorganization, and creditor interests and other claims are represented by committees. Also in Chapter Eleven, CO-DEBTORS are not protected by the automatic stay. It's assumed under the law that most business failures result from unavoidable market changes, rather than from incompetent management or fraud, so an individual debtor is usually allowed to remain in control of the business during reorganization, unless the court finds just cause or other reason to have a trustee run it. Of course, filing Chapter Eleven will affect the business's credit rating, as well as impact its shareholders.

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