What are the advantages of a formal reorganization under Chapter 11?

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What are the advantages of a formal reorganization under Chapter 11?

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What are the advantages of a formal reorganization under Chapter 11?

Explanation & AnswerSolution by a verified expert

Explanation

Following are the advantages of filing for bankruptcy under Chapter 11-

The bankrupt firm may delay interest and principal payments without a penalty until the court approves a reorganization plan. This delay helps the company reinvest the cash flows generated to sustain the operations rather than immediately paying the creditors.
The firm is allowed to issue debtor-in-possession financing. In this type of financing, a firm's credibility is enhanced to borrow short-term funds. These loans are senior to any type of debt that a firm holds before filing for bankruptcy.
The firm is given 120 days to form a reorganization plan after filing for bankruptcy protection, which can be extended to 18 months.

Verified Answer

Following are the advantages of filing for bankruptcy under Chapter 11-

The bankrupt firm is allowed to delay interest and principal payments without a penalty until the court approves a reorganization plan.
The firm is allowed to issue additional financing for its short-term requirements.
The firm is given a certain amount of time to form a reorganization plan after filing for bankruptcy protection

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