Businesses the world over have been facing severe financial challenges in recent years. The consequence has been unemployment for many people as companies struggle to remain competitive as costs rise and access to working capital dries up.

Even healthy companies have found traditional lenders reluctant to extend credit, as banks have become overly cautious and look out for themselves. However, without credit to cover the short term ups and downs, many businesses have been unable to maintain their financial commitments.

Firms in this position often have no option but to file for bankruptcy.

Chapter 11 bankruptcy is not a situation where all is lost and the company folds. Certainly, if the bankruptcy court trustee feels that the business has no future and its problems go well beyond cash flow, chapter 7 may be invoked and that really is the end of the line, but chapter 11 allows the company to continue trading under a legally binding repayment plan.

In this way the court reschedules the company’s outstanding debt so that the company can make repayments to creditors in the longer term, thus it can continue trading and “catch up” with its financial commitments.

Chapter 7 requires the liquidation of all assets, which means that if a company goes down this road, the business is effectively finished. Chapter 11 requires no sale of assets, indeed the assets are necessary to allow the company to continue trading, and in the court’s eyes, to repay its creditors.

That is not to say that there is no financial loss incurred. The repayment plans terms can be quite harsh and leave very little spare cash. In addition, any company that files for bankruptcy cannot expect its market value not to fall.

Assets that the trustee deems are not essential to the business may have to be sold to raise cash so that a realistic repayment plan can be implemented. The main focus is always on ensuring that the creditors get paid.

Not all companies can file under chapter 11. Some are specifically excluded such as insurance companies and utilities. Chapter 11 varies from state to state, so rules differ depending on what part of the US the company is located.

Global corporations present huge legal problems when a division of the corporation wants to file under chapter 11, as companies can attempt to “bend the rules” by “restructuring” to take maximum advantage of the situation.

Large companies can move or hide assets within other parts of their operations, making it difficult to work out exactly which part of the business is responsible for that part of the company in question.

When financial conditions are favorable you can be inclined to spend and borrow more cash. But when the financial conditions change, you can find yourself redundant and unable to cope. If you are thinking of declaring yourself bankrupt and wnat more free information, visit www.declaringyourselfbankrupt.org.. This article, What is Chapter 11 Bankruptcy? has free reprint rights.

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