The bankrupt company, or debtor, may attempt to use Chapter 11 Bankruptcy to reorganize in order to once again become profitable. In Chapter 11 Bankruptcy, Management runs everyday business as usual, but all significant business decisions must be approved by a bankruptcy court. This differs from Chapter 7, during which all assets are liquidated and the company goes out of business. Most companies chose Chapter 11, though sometimes a plan for reorganization cannot be developed and the company ultimately liquidates. Major companies that have undergone Chapter 11 Bankruptcy include K-Mart, WorldCom, and Enron. Filing for Chapter 11 is extremely complicated and must be done with the help of an experienced bankruptcy attorney.
How it works
The Justice Department, through the U.S. Trustee, appoints one or more committees to represent the interests of creditors and stockholders while working with the company to develop a plan to get out of debt through reorganization. Before being put into action, the plan needs to be accepted by creditors, bondholders, stockholders, as well as be confirmed by the court. This process can take from a few months to several years.
During the bankruptcy process, the role of the SEC is fairly limited. It typically :
-reviews the company’s disclosure document, to ensure that all relevant information is being revealed to investors and creditors.
-ensures that stockholders are represented by an official committee.