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Why would a company choose Chapter 11 bankruptcy?

Chapter 11 bankruptcy proceedings are clearly the preferred choice for New York companies, but why is that? The main reason why companies prefer Chapter 11 -- over Chapter 7 for example -- is because Chapter 11 proceedings allow a company to remain in operation. Essentially, Chapter 11 gives companies the ability to reorganize their debts so they can climb out of financial trouble and establish a more solid financial stance in the business sector again.

Numerous New York firms have risen from the ashes of Chapter 11 bankruptcy to become stronger, more profitable, more streamlined, more effective and more successful in their fields. In other cases, Chapter 11 might also result in liquidation if paying off the debts is too difficult and/or impossible for the company to achieve. However, Chapter 11 at least provides the chance for successful reorganization and the continuation of the business -- which could serve to prevent unnecessary layoffs, preserve jobs and ensure the continued life of a New York firm.

When Chapter 11 proceedings are filed, the Justice Department appoints one or more committees, which represent creditors' interests, in addition to the interests of stockholders, while negotiating with the company to arrive at a debt reorganization plan to pay off its financial obligations. This reorganization plan has to be accepted by the stockholders, bondholders and creditors -- and it has to be confirmed by the bankruptcy court -- before the company can move forward and begin paying off debts according to its terms.

Once the reorganization plan has concluded, and all the bankruptcy payments have been successfully made according to the terms of the reorganization plan, any remaining debts covered by the bankruptcy will be resolved. This pay off process usually takes several years or more to complete.

Although Chapter 11 proceedings can be very helpful in assisting companies that want to stay afloat and resolve outstanding debt, it is not for every business. Therefore, it is important for company leaders to discuss their financial situation in depth with a qualified bankruptcy attorney before deciding to engage on the process.

Source: U.S. Securities and Exchange Commission, "Corporate Bankruptcy," accessed March 25, 2016

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