Chapter 11 is...bad. If you have to declare it, it means you're a deadbeat. You can't pay the bills you promised to pay, and now you're...out.
In the olden days, debtors would go to prison and basically stay there forever. Today, we handle money issues a bit more humanely.
In theory, Chapter 11 forms of bankruptcy exist in order to give the company that went bust time to become profitable again. Unlike a Chapter 7, which aims to quickly purge everything and start clean, a Chapter 11 form is kind of a control-alt-delete reboot of debts. The business can file a petition for bankruptcy protection, and with that be granted a break from collection activities for a period of time...and use the break to reorganize its debts. Creditors figure they may as well work with the business before it sinks or files a Chapter 7, and potentially writes their debt off.
So a Chapter 11 reorg is a kinder, gentler form of 7, wherein companies basically turn their pockets inside out and say "Uh.. sorry/not sorry."
In the Chapter 11 process, a business has to categorize its liabilities, and present financial information and a reorganization plan to the court. The debts are categorized state/federal agencies, wages owed, and shareholder interests.
Once the plan is approved by the court, the business follows the new plan going forward. However, sometimes the court will convert the 11 to a Chapter 7 because the business just can’t realistically become profitable again. The court is basically saying, “We appreciate your spirit, but it’s time to throw in the towel.”
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