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What is Chapter 11 bankruptcy? Understand the basics

What is Chapter 11 bankruptcy? Understand the basics

In the complex world of finance and business, bankruptcy serves as a crucial mechanism that allows struggling companies to reorganize and regain financial stability. 

One of the most well-known forms of bankruptcy is Chapter 11, a legal process in the United States that grants businesses the opportunity to restructure their operations while protecting them from creditors’ immediate demands. This article delves into the intricacies of Chapter 11 bankruptcy, its objectives, procedures and notable examples within the realm of the cryptocurrency industry.

Chapter 11 bankruptcy, explained

Chapter 11 bankruptcy, often referred to as “reorganization bankruptcy,” provides companies, both large and small, with the chance to rehabilitate their financial health while keeping their operations intact.

This chapter allows a debtor (the company) to propose a plan that outlines how it will address its financial obligations, including repaying creditors over an extended period, reducing debts and restructuring operations for improved efficiency and profitability.

Related: Prime Trust bankruptcy spotted by crypto community months ahead

The objectives of Chapter 11

The primary goals of Chapter 11 bankruptcy are twofold: to provide the debtor with an opportunity to reorganize its financial affairs and to maximize the return for creditors.

By granting the debtor a chance to revamp its operations and financial structure, Chapter 11 aims to facilitate the company’s return to profitability, safeguarding jobs and business continuity.

The Chapter 11 bankruptcy process

  • Filing for bankruptcy: The process starts when the struggling company files a Chapter 11 bankruptcy petition with the appropriate federal bankruptcy court.
  • Automatic stay: Upon filing, an “automatic stay” is imposed, halting most creditor actions against the company. This provides the debtor with temporary relief from creditor pressure, allowing for the formulation of a reorganization plan.
  • Creating a plan: The debtor is typically granted a limited period to exclusively propose a reorganization plan. This plan details how the company will address its debts, reduce costs, and streamline operations. The plan must be approved by creditors and the court.
  • Creditor voting: Creditors vote on whether to accept or reject the reorganization plan. If a majority of creditors in each class vote in favor, the plan moves forward.
  • Confirmation: The court then evaluates the plan, ensuring it meets legal requirements and is fair…

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