Chapter 11 bankruptcy, one of the most complex forms of bankruptcy under U.S. law, allows a business that is about to fail to restructure its operations to stay in business rather than simply liquidate all its assets. This type of bankruptcy is also called “reorganization”.
Simply put, bankruptcy occurs when an entity cannot pay its bills and a court must decide how to distribute its remaining assets. Individuals, businesses or governments may experience bankruptcy.
Running out of money doesn’t necessarily mean you’re bankrupt. There is a code of law dedicated to bankruptcy in the United States, and the process is supervised by the courts with a formal process.
Chapter 11 bankruptcy is one of many parts of the US bankruptcy code, with specific legal requirements. As you probably guessed, Chapter 11 gets its name from the section of the code where the relevant requirements are written.
Chapter 11 is also referred to as “reorganization” or “restructuring” bankruptcy, because the general theme of this section of the law is to allow a company to continue to do business – and in some cases, exit from bankruptcy entirely. bankruptcy proceedings to get a second chance.
There are several other chapters in the bankruptcy code:
- Chapter 7 bankruptcy is the simplest form of bankruptcy, also known as liquidation. The bankrupt must sell all his assets, then a court decides which creditors will be paid and in what order.
- Chapter 9 is a special bankruptcy for US municipalities, designed to allow them to serve voters even if it requires adjusting debt and repayment terms.
- Chapter 12 bankruptcy is reserved for agricultural operations, including family farms and family fisheries.
- Chapter 13 allows individuals to restructure and repay their debts over a period of three to five years.
- Chapter 15 is a special form of bankruptcy that applies to entities with debts in multiple countries.
On very rare occasions, a person may file for Chapter 11 bankruptcy. But because Chapter 11 bankruptcy law is drafted to be used only when it is in the best interests of creditors, it is often not an option for many people.
Typically, you’ll hear about Chapter 11 in the context of a large company that will eventually pay off more of its debt by continuing to operate rather than suddenly selling.
Bankruptcy is basically a case where one owes more money than the entity can afford to repay. However, this situation can occur for many different reasons.
Sometimes a business is just stuck in a long-term decline and making less and less money every year until it just can’t pay its bills. Other times, a business that seems resilient is hit by a disastrous event, like a thriving restaurant that has suddenly been hit hard by the COVID-19 pandemic. In some cases, a company can even go bankrupt because of a scam or a scandal revealing a falsified financial situation.
Most of the largest Chapter 11 bankruptcies in US history are in the tens of billions of dollars. It can be difficult to identify one company as the definitive leader, as bond and asset valuations can vary widely before and after a Chapter 11 intervention by the courts.
A recent large-scale Chapter 11 bankruptcy involved California utility PG&E Corp. (ticker: PCG), which held $71 billion in assets and had more than $30 billion in liabilities related to lawsuits and regulatory breaches after its equipment sparked the 2018 campfire.
However, the scale of PG&E’s bankruptcy pales in comparison to the largest bankruptcy on record. During the 2008 financial crisis, financial services company Lehman Brothers Holdings Inc. had $639 billion in assets and $613 billion in liabilities when it filed for bankruptcy.
It is possible to survive a Chapter 11 bankruptcy filing. In the above case of utility PG&E, a restructuring finally allowed it to emerge from bankruptcy court oversight in 2020, and it was valued at approximately $24 billion in July 2022.
Worse still are the tangible consequences for related investments on Wall Street. Bankruptcy results in an instantaneous downgrade of bond ratings by credit agencies. In some cases, there may be an outright default on the debt where payments on the obligations stop completely.
Common stocks are generally not protected in the event of bankruptcy. This means that it will eventually drift lower and lower until the value of those stocks hits zero. Sometimes a company comes out of Chapter 11 to reissue stock in the public markets. However, these are new shares and do nothing for investors who hold the old and often worthless shares of a bankrupt company.
Cryptocurrency brokerage firm Voyager Digital Ltd. filed for Chapter 11 bankruptcy in July 2022. Volatility in bitcoin and other crypto assets has hurt the once vibrant fintech company.
Scandinavian Airlines also filed for Chapter 11 in July 2022 thanks to travel disruptions in Europe caused by the pandemic, the war in Ukraine, rising labor costs and the threat of a prolonged employee strike. .