Chapter 11 Bankruptcy for Business: What Happens to a Business and its Employees

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Petition to file for chapter 11 bankruptcy for business

What does Chapter 11 bankruptcy mean for a business?

Chapter 11 Bankruptcy for business focuses on the “reorganization” of the assets and debts of a corporation, partnership, or a sole proprietorship. It is a way for the business to stay afloat while committing to their creditors that they will pay their debt over time. Chapter 11 bankruptcy for business is a dense question, because the outcome of filing is dependent on the formation of the business. For example, corporations and partnerships can pass liability onto the business and are usually protected individually. However, a sole proprietorship will be liable as a business and as an individual. This means that business as well as personal assets are available to the creditors to satisfy the debt owed them. Thus, chapter 11 for a sole proprietorship may not only be detrimental to the business but, also, to the personal assets of the owner.

Partnerships may also be liable under chapter 11. General partnerships are generally protected due to the fact that the partnership is separate from the individuals. Although, there are times where creditors can seek individual partner assets. This could force individual partners to file bankruptcy in a different chapter to protect themselves.

Corporations are separate entities from those who own the company, the stockholders. This will allow protection from a chapter 11 filing taking the personal assets from shareholders. As noted earlier, chapter 11 is weighted differently depending on how the business was formed in the beginning.

What does Chapter 11 bankruptcy mean for employees?

Employees and chapter 11 bankruptcy for businessRarely are two chapter 11 bankruptcy for business the same. Each situation, depending on what was discussed above, will bring different outcomes for employees. A chapter 11 filing puts fear into many individuals, especially the employees. Employees are fearful for the cut in hours, decrease in wages, and, maybe even, loss of a job. However, chapter 11 is a reorganization of the business’s assets to satisfy debts to creditors. Chapter 11 will allow a business to continue its day to day business while paying back creditors. Employees will continue to work at their normal position, unless the reorganization causes disturbances in company positions.

Also, there could potentially be bad news on the horizon for employees once chapter 11 is filed. Chapter 11 signifies that a business is in a position that they cannot satisfy their creditors so a reorganization of the business will allow them to stay in business. Sometimes chapter 11 bankruptcy for business can lead to a chapter 7 liquidation. Most businesses are in trouble when they have to file for chapter 11, so the continual spiral downward to chapter 7 would not be a surprise. If this happens, then employees will lose their jobs while watching the business dissipate. There are many fantastic examples of companies turning around after filing chapter 11. In the end, employees should be aware that each circumstance dealing with a chapter 11 filing is different. It may bring added success and job security, or it may bring the dissolution of the business.

What does Chapter 11 bankruptcy mean for shareholders?

When a business files for chapter 11, shareholder’s stock will still have value. Although, stock is temporarily frozen. That means that stock is no longer publicly listed, but it still may be moved from one person to another in the market. During this transition phase of chapter 11 the stock will still be of some value to a shareholder. That is why chapter 11 is not as worrisome for shareholders as chapter 7 would be. Chapter 7 would cause liquidation of all assets, meaning that secured and unsecured creditors would be paid first. Then shareholders would divide the rest of the assets. This usually leaves very few assets to divide leaving small amounts for shareholders.

It is the threat of bankruptcy that causes stock to fall. It may have been traded at $60 a share before, but after talk about bankruptcy the shares may be $5. The stock will still be available to the shareholder, but the shareholder may lose most of the value of the stock based on concerns that follow chapter 11 bankruptcy.