When most people think of a company going bankrupt, they might imagine that the business files for Chapter 11 bankruptcy. Depending on the situation, some businesses file for Chapter 7 bankruptcy. If you thought that there was one type of bankruptcy for individuals and another for businesses, you are mostly correct. As it happens, either an individual or a corporation can file for Chapter 7 or for Chapter 11 bankruptcy. Most people, however, file for personal bankruptcy under Chapter 7 (which accounts for over 65 percent of consumer filings).
Chapter 11 (so named after Chapter 11, Title 11 of the United States Bankruptcy Code), while not exclusive to corporations, is more widely used by a business or other professional entity. The reason for this is that under Chapter 11 (also known as Chapter 11 corporate bankruptcy), the company can reorganize its finances. This in turn allows the corporation to stay open while it’s reducing its debt and working out a debt repayment plan with its lenders.
When faced with a financial hardship and substantial debts, Chapter 11 bankruptcy provides a business with the opportunity to keep ownership of whatever assets the business has (as well as control over those assets). While under Chapter 11, the company is considered a debtor in possession. This means that the corporation maintains control of business operations while reducing their debt. This is how a company can stay in operation while it negotiates with the Bankruptcy Court and its creditors a way to pay back what is owed.
Another aspect of Chapter 11 bankruptcy is that a corporation, even one that has filed for protection, can apply for loans and other forms of financing. The terms on these loans aren’t necessarily punitive, either; it’s possible for a company under Chapter 11 to get favorable terms and interest by giving the new debt seniority over all other debts. Financial seniority refers to the order in which debts are repaid. For debtor in possession financing, those new loans are given first priority over all other money that’s due to a lender or creditor.
Perhaps one of the more famous filings under Chapter 11 is the recent bankruptcy of Lehman Brothers, the investment bank, which filed in 2008. It is currently the largest bankruptcy in United States history with a listed total of $639 billion in assets. Second to this is the Chapter 11 bankruptcy filed by Washington Mutual in 2008, where the total assets listed amounted to $327 billion. Both bankruptcies are part of the subprime mortgage crisis that led to the Great Recession.
Although both businesses and individuals can file for Chapter 11 bankruptcy, the amount of debts and assets typically needs to be substantial in order for an individual to benefit from this type of debt reduction strategy.
If you’d like to learn more about bankruptcy, especially the kinds of bankruptcy available, you can read more about
- Chapter 7 (this is total liquidation of your possessions);
- Chapter 9 (municipal bankruptcy);
- Chapter 13 (which gives you a structured payment plan); or
Just because there are options available to you for bankruptcy doesn’t necessarily mean that bankruptcy is the right debt reduction strategy for you. AmONE can help you determine the best way for you to reduce your debt, without filing for bankruptcy.
To find the highly rated debt solutions available, you can complete our easy online form. You can also call us toll-free at 888-401-0330 to speak with one of our experienced financial search specialists. AmONE’s free service helps match you with the highly rated solutions available for reducing your debt so you don’t have to file for bankruptcy protection. Our offices are open Monday through Friday from 9:00 AM to 9:00 PM and on Saturday from 9:00 AM to 5:30 PM Eastern time.
