The United States bankruptcy law has six chapters, each addressing a distinct part of the procedure. They are as follows: Chapter 7 is for liquidation, Chapter 9 focuses on municipalities, Chapter 11 deals with reorganization of debt payment and is mainly for companies, Chapter 12 is for family farmers, Chapter 13 looks into repayment alternatives, and Chapter 15 deals with international bankruptcies. The most frequently filed are Chapters 7, 11, and 13.
A Chapter 7 bankruptcy is the immediate liquidation of an individual’s non-essential assets by a court-appointed trustee. Under Chapter 7, the court will wipe off a credit card debt but not any outstanding taxes or student debts.
A company will file for Chapter 11 bankruptcy if it needs time to reorganize its obligations. However, if the debtor fails to meet its commitments under the restructuring plan, the term will change. After filing for bankruptcy, debtors are generally allowed to continue not only operating their businesses, but also obtaining new loans, provided that the bankruptcy court has given the go-ahead.
Essentially, the restructuring plan is an agreement between the debtor and the creditor, outlining the terms under which the firm would conduct itself and meet its debt commitments in the future. Because the plan impacts the business’ creditors the most, they can vote on the submitted reorganization plan. If the plan receives the required votes and meets specific legal conditions, the bankruptcy court can then approve the schedule. Often, most plans call for some downsizing to save money and assets.
Chapter 13 allows companies to operate under reorganization plans but requires a court-appointed trustee to be continually involved. They will review and propose the restructuring plan to the court, collect and distribute payments to the creditors, and may even petition the court to convert it to a Chapter 7 liquidation or even dismiss the case if the debtor fails to satisfy the repayment conditions.
With everything, there are advantages and disadvantages to filing Chapter 11. One advantage is that, unlike businesses that file for Chapter 7 bankruptcy and have to stop their operation and sell their assets to pay off creditors, companies that file for Chapter 11 bankruptcy can keep running, but with the help of a judge, for a while.
An often-overlooked benefit of Chapter 11 bankruptcy is that it frees the company owner from all claims, debts, and other possible liabilities. To encourage buyers, the bankruptcy court often authorizes the sale of the company; it usually indicates that the buyer is free and clear of all claims, liens, and other possible liabilities of the previous owner. Thus, a buyer may be ready to pay much more for a company in Chapter 11 than outside of bankruptcy.
Chapter 11 is the most complicated and costly of all the bankruptcy proceedings. A company must only consider Chapter 11 after all viable options have failed. For a corporation contemplating bankruptcy, the legal fees alone may be prohibitive. In addition, the bankruptcy court must accept the reorganization plan, which must be manageable enough that it can pay off the debt over time.
A company that files for Chapter 11 bankruptcy also loses control over business choices not made in the “normal course of business.” Acquiring financing, selling assets, employing specialists, and settling with creditors are all instances of commercial actions that go beyond the “regular course of business.” The company must get approval from the bankruptcy court before making a business move that may be beyond the “normal course of business.”
