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Chapter 11

Chapter 11 is a part of the US bankruptcy code.

When a troubled business decides that it is unable to service its debt or pay its creditors, it can file (or be forced by its creditors to file) with a federal bankruptcy court for bankruptcy protection under either Chapter 7 (liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations. A Chapter 11 filing, on the other hand, is an attempt to stay in business while a bankruptcy court supervises the "reorganization" of the company's contractual and debt obligations. The court can cancel, in all or in part, some or all of the company's debts and its contracts, so that the company can make a fresh start. Often, if the company's debts exceed its assets, then at the completion of bankruptcy the company's owners (stockholders) all end up with nothing -- all their rights and interests are terminated -- and the company's creditors end up with ownership of the newly reorganized company, in the hopes that it will eventually succeed financially as compensation for their losses.

All creditors who register with the court can be heard by the court, which tries to distribute the bankruptcy proceeds in an equitable fashion. Secured creditors, such as bondholders, have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not been paid for products they previously delivered to the company. Once a business files for Chapter 11 bankruptcy, its creditors are not allowed to attempt to collect previously incurred debts except through the bankruptcy court. Under some circumstances, creditors can force the company into Chapter 7 bankruptcy, if it seems that this will result in more compensation for the creditors.

Typical debts and contracts cancelled in a Chapter 11 bankruptcy include unsecured loans and, if cancelling them would be financially favorable to the company, union contracts and long-term real estate leases.

Once Chapter 11 is filed, the company may "emerge" from bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy.

The largest bankruptcy in history was of the US telecommunications corporation Worldcom, Inc, which listed over 103 billion dollars in assets as of its Chapter 11 filing in 2002; the bankruptcy was triggered by the discovery that in the previous several years, the company had fraudulently overreported its assets by an estimated 12 billion dollars.

2003 Statistics

Bankruptcy filings by individuals:

Bankruptcy filings by businesses:

The total number of bankruptcies rose 7.4 percent over the previous twelve months. These totals were for the 12-month period ending September 30, 2003.

Source: November 14 2003 News Release, Administrative Office of the U.S. Courts. (External link to PDF file: [1])

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