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What Does AA's Chapter 11 Bankruptcy Mean?

By Cynthia Hsu, Esq. on November 30, 2011 | Last updated on March 21, 2019

American Airlines made waves this week when the company filed for Chapter 11 bankruptcy protection. The company said the move was spurred by high labor costs and the downturn in the economy.

The airline hasn’t been the only one hit with high costs and financial instability from its high pension cost. Carriers like American have also had a difficult time competing against discount airlines.

However, many individuals are not particularly familiar with Chapter 11. What exactly will happen to the company in the process?

Chapter 11 is primarily meant to allow reorganizations of companies who are under debt. Corporations and small businesses may qualify. The goal of a Chapter 11 filing is to make a business profitable again. To get there, the following steps are taken:

Under Chapter 11, creditors are temporarily stopped from collecting. Chapter 11 filings will halt creditors for a period of time while the company plans out its reorganization efforts. This is in contrast to Chapter 7 filings, which typically involve liquidating assets to satisfy debt.

Businesses who file Chapter 11 will usually continue to conduct business. Corporations are usually able to continue on with their daily operations with limited interruption.

The debtor starts to figure out repayment options to creditors. This process is usually supervised by the bankruptcy court. The amount paid to creditors is typically negotiated down.

The debtor then makes a reorganization plan. Since businesses are trying to become profitable under a Chapter 11 filing, debtors will usually try to negotiate leases and contracts in an effort to reduce their debt. The reorganization plan will be voted on by creditors and approved by the court.

American Airlines' Chapter 11 bankruptcy likely won't mean disruptions for passengers. But for its employees, it could mean unions and workers will face negotiations over wages and benefits as the carrier tries to reduce costs.

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