To the general bankruptcy public, Chapter 11
filings will not be a major concern. Though technically possible for
individuals, filing for Chapter 11 is much more common for corporate
entities. Thus, unless they are business executives or sole proprietors, Chapter
11 filings will fall outside the realm of interest for most
Still, in terms of absolute incidents of filing for Chapter 11, over 10,000 petitions for
reorganization are filed in the United States per year, which is a significant
and fairly high amount. Therefore, it can be said that Chapter 11 bankruptcy
has a real function in the American economy.
Some notes on the prominence and purpose
of Chapter 11 filings today:
As with other forms of bankruptcy, filing for
Chapter 11 can be at least in part defined by what it is not. In contrast with Chapter
7 bankruptcy, Chapter 11 seeks a reorganization rather
than liquidaton of assets. Then
again, it may be a creditor or creditors who wind up filing for Chapter 11
bankruptcy on behalf of their debtor. This is not merely a magnanimous gesture
on creditors’ part, though.
As voluntary Chapter 11 filings are
usually sought to put a hold on the the demands of lenders, compulsory
petitions are essentially a means to an end. That is, they are in response to a
claim for monies owed to creditors that heretofore have gone unanswered. In
filing for Chapter 11 then, the goal of creditors is to reach an equitable
solution for the return of as much of their loaned funds as possible.
Regardless of whoever makes the initial
request, Chapter 11 filings are designed to allow a business to keep
running while it and its debt are
reorganized. Of course, in cases of questionable leadership, the permission of
companies to remain in action, often with little to no punishment for the
offending officers, is reasonably questionable in its own right. Nonetheless,
sometimes filing for Chapter 11 may be a saving grace to employees and stockholders alike. For
instance, Chapter 11 proceedings may be used to
transfer ownership to a new, more capable owner, in the process saving jobs.
Reorganization may also be worthwhile in maximizing a company’s value prior to
the sale of its parts.
Once upon a time, Chapter 11
bankruptcies in the United States may have been an afterthought for many
Americans; something more remote or abstract. However,
when their favorite store or restaurant chain recently went out of business,
the theoretical decision to file Chapter 11 bankruptcy suddenly became very
real. It is not as if Chapter 11 bankruptcies are only happening in one
section of the country.
Amid the recession, businesses are failing to
meet their debts or are just failing period, and not just in retail and food
service, but in a number of important industries. In short, everyone is feeling
the pinch from the hurting economy, and as companies continue to file
Chapter 11 bankruptcy, the effects are
felt by consumers.
Oftentimes, the move to file Chapter 11
bankruptcy by a corporation is a precursor to its disappearance as known and/or
the eventual liquidation of its assets. Indeed, both Chapter 11 bankruptcies
and closures have risen in incidence since news of the recession first began to
inundate news reports, and as a result, a
“Catch-22” situation of sorts has ensued.
With companies going under and thus fears of
inability to maintain solvency ever-present, consumer confidence has taken a
toll, and Americans are striving to save where they can. However, in doing so,
they are hurting an already damaged U.S. economy so critically dependent on people
spending money, and yet more businesses are forced to shut down. Truly, the
need for individual organizations to file Chapter 11
bankruptcy creates a vicious cycle for consumers and producers.
It must be stressed that Chapter 11
bankruptcies do not always lead to companies going out of business. After
all, to file Chapter 11 bankruptcy is to attempt to reorganize a
business/estate so that it will be able to keep its head above water.
Nonetheless, even though a store or other corporate entity may not go out
completely, it may still be forced to close certain branches that are under–performing in these uncertain times. As these
subdivisions go, not only do the customers, but also the employees.
The lack of consumer confidence coupled with
the unexpected job losses have certainly affected companies and individuals in
the here and now, but long-term goals are also being impacted by the current
climate. Concerning pre-recession projects, numerous public works and housing
developments have had to be halted mid-stream because funding has run out from
the agency or individuals that were supposed to be sponsors. Moving forward,
the collateral damage from so many decisions to file Chapter 11
bankruptcy has hurt families’ dreams of home ownership.
Like the other forms of bankruptcy relief,
but to a larger extent, Chapter 11 law is supplemented by the Federal
Rules of Bankruptcy Procedure, which are handed down to bankruptcy courts by
the Supreme Court. The Federal Rules of Bankruptcy Procedure govern legal events, such as adversary litigation in bankruptcy matters, time
constraints for motions to be filed, and conditions for appeal to a higher
Currently, and like the other forms of bankruptcy relief, Chapter
11 law itself is housed within Title 11 of the United States Code. Chapter
11 bankruptcy law is composed of four subchapters that deal with specific
aspects of corporate reorganization proceedings. The first deals with the
logistics of Chapter 11 bankruptcy proceedings, namely the roles and
responsibilities of each party involved, if applicable. The second is concerned
with the formation, discussion and confirmation of a reorganization plan. The
third is devoted to typing up post-confirmation loose ends, and the fourth
deals in particular with railroad reorganization, perhaps showing the age of
the laws that influenced the chapter as a whole.
As for those predecessors to Chapter 11
law, it should be noted that the component parts of Chapter 11 bankruptcy
law were once separate subsections of the Bankruptcy Code. They were
united into Chapter 11 law as we know it today by virtue of the Bankruptcy
Reform Act of 1978.
The casual observer might only become aware
of the more prominent Chapter 11 filings in America through television
reports or newspaper stories, and consequently, think that they are exceedingly
rare. Especially in the wake of the recession affecting the United States, though,
accounts of corporations filing for Chapter 11 bankruptcy seem to be
Chapter 11 bankruptcy, which is also known as
corporate reorganization, is meant for the reallocation of assets to manage a
debt repayment plan, and is therefore much more often requested by businesses
than individuals. Of more than 14,000 filings under Chapter 11 in 2009 in
the United States, over 90% were a result of voluntary applications by
executive officers or involuntary calls for reorganization by creditors and
others. As for regional differences, as with Chapter 7 filings, Chapter 11
bankruptcy is highest in the Ninth Circuit and lowest in the First.
As of late, trends in Chapter 11
filings are a point of worry to many. Only two (fiscal) years ago, the
total number of Chapter 11 bankruptcy petitions was less than 6,000. Come
2009, this annual sum jumped to over 14,000. Basic math will tell you that the
amount of requests for reorganization have more than doubled in this time, and
realistically, is a short span for such a profound increase to occur. Overall,
the insolvency of numerous companies as demonstrated by these spikes and those
of Chapter 7 rates is of little solace to those who have lost their jobs to the
need of organizations to balance their debt.
In terms of the most costly Chapter 11 bankruptcies
of all time, certain industries tend to jump out at one upon review. Perhaps
ironically, and symbolized by Lehman Brothers’ collapse as the
biggest Chapter 11 bankruptcy of all time, financial services corporations
have dotted the bankruptcy landscape. Telecommunications (e.g. Worldcom, MCI),
energy/utilities (e.g. Enron, Texaco), and automotive/transportation (e.g.
General Motors, Delta Air Lines) have also contributed to make up the majority
of cases where companies with billions of dollars in assets were for a time
insolvent and/or shut down for good.