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The process of the reorganization of a bankrupt company under the supervision of a court or the appropriate regulator. Chapter 11 proceedings require a reorganization plan, which is filed with the bankruptcy court or regulator and describes how an insolvent company will change structurally to help it pay its debts and stay in business. This plan is subject to court or regulator oversight to ensure enforcement. Depending upon the specific plan, a company's original owner or managers may maintain control. Other times, the company's creditors become the new owners of the business; this especially happens when one or more creditors have had their debt completely discharged. Changes also must occur structurally (perhaps in risk management or marketing or perhaps in something more fundamental) to ensure that the bankruptcy does not repeat itself.
A bankruptcy option in which a trustee is appointed to reorganize the bankrupt firm. Although the existing claims of security holders are likely to be reduced or replaced with different claims, it is expected that the firm will continue operating. Both creditors and owners must vote approval of the plan before the reorganization can be confirmed by court action and become effective. See also prepackaged bankruptcy, reorganization plan.
Case Study The turn of the century produced difficult business conditions for many companies, including one of America's technical giants, Polaroid Corporation. Founded by Edwin Land and George Wheelwright in 1937, Polaroid was best known for instant photography and glare-free sunglasses. During the 1960s and early 1970s the firm's common stock was part of the "Nifty Fifty," a collection of must-own securities for many portfolio managers and individual investors. Changing consumer preferences, a technological revolution in photography, debt incurred to fend off an attempted takeover, and faulty management decisions during the next several decades sent the firm's stock into a downward spiral until the shares traded for only 28¢ just prior to filing for Chapter 11 bankruptcy protection on October 12, 2001. At the time of the filing the company listed $1.81 billion in assets and $948 million in debts, including a $360 million bank loan that was due in one month. The stock traded as high as $60 per share in 1997. Polaroid's problems stemmed in large part from the increased popularity of digital photography, which captured substantial market share from the firm's products in instant photography. Other photographers discovered the widespread availability of one-hour processing was nearly as convenient and less costly than instant photography. Polaroid had taken on substantial debt in 1988 when it successfully fought a takeover attempt by Shamrock Holdings. The combination of large debt, high costs, and deteriorating market share doomed an American icon. At the time of the bankruptcy filing many analysts expected the firm to be liquidated and its assets sold piecemeal.