How Chapter 11 Bankruptcy Transforms Corporate “Losers” Into “Winners”

February 1st, 2010 by Reed Allmand

Chapter 11 bankruptcy has been talked about often throughout 2009. Companies such as GM, Chrysler and CIT Group which all seemed on the brink of complete failure filed Chapter 11 bankruptcy and came back from the abyss.  But how does Chapter 11 bankruptcy work its magic? How does it transform corporate losers into winners?

1. Chapter 11 bankruptcy allows the company filing bankruptcy to continue operating their business.  This is exactly what most bankrupt companies need, the ability to restructure their debts AND continue to operate and make money.  Otherwise they would file Chapter 7 bankruptcy which is a complete liquidation of the company.
2. Chapter 11 bankruptcy allows the business to terminate contracts that may be contributing to the company’s failure.  Many businesses who file Chapter 11 bankruptcy are in trouble because they have unprofitable agreements which are sinking their business.  By allowing the company to break these agreements, bankruptcy gives them a better chance of coming out a winner after bankruptcy.
3. There are no debts that can’t be discharged in Chapter 11 bankruptcy.  And in most cases, unsecured creditors receive little or no payment.  This is why many companies are able to shed well over 50 percent of their debt during Chapter 11 bankruptcy, giving them a huge advantage over companies who have not filed bankruptcy.
4. For the remaining debts, Chapter 11 bankruptcy allows the business to repay their debt in smaller payments and over a longer period of time.  This arrangement relieves the monthly debt burden for most companies exiting Chapter 11 bankruptcy.

At the end of their bankruptcy proceeding, companies emerge stronger and more able to compete by having less debt and less burdensome agreements.