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May 23, 2008, Newsletter Issue #65: Chapter 11: A Reorganization, Not a Liquidation
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Tip of the Week
Chapter 11 bankruptcy law allows the filing company to devise a plan to pay off former creditors while continuing to operate. This plan is considered a “reorganization” of the company’s operating strategy and financial status, which serves to satisfy former creditors and future creditors at the same time. Instead of simply ordering the company to liquidate all of its assets to pay old debts and cease doing business (Chapter 7), this chapter of the federal bankruptcy code is designed to save a company from extinction. This section of the bankruptcy code has proven to be critical to many U.S. businesses, e.g. Chrysler Corporation, allowing them not only to exist, but to prosper over the long term. The rationale for this section is that a company may be worth much more to its creditors if considered a “going concern” rather than a dead entity whose assets are sold at “fire sale” prices.
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