Bankruptcy is a federal court process designed to help consumers and businesses eliminate debt or repay debts under the protection of the bankruptcy court.
There are two categories of bankruptcy, "liquidation" or "reorganization":
- Liquidation bankruptcy (or Chapter 7) – a consumer or business asks the court to discharge the debts owed (some debts cannot be discharged). In exchange, the business’s assets or the consumer’s property is sold (liquidated) and the proceeds are used to pay off the creditors.
- Reorganization bankruptcy (or Chapter 11)- involves filing a plan with the bankruptcy court suggesting how you will repay your debt. Some debts must be repaid in full while others require only a percentage or nothing at all.
What is the Difference between Chapter 11 and other types of Bankruptcy?
- Chapter 11 (business reorganization) – is a type of reorganization bankruptcy, like Chapter 13. Chapter 11 is available to individuals, corporations, and partnerships. It has no limits on the amount of debt, again, like Chapter 13. Chapter 11 is the typical bankruptcy choice for large businesses seeking to restructure their debt and become profitable again. Chapter 11 is the most flexible of all the bankruptcy chapters, which makes it generally more expensive to the debtor. The rate of successful reorganizations is very low.
- Chapter 7 – is the usual choice for individuals, however, a company can choose to file for Chapter 7 if it intends to stop all operations and go out of business.
What Happens if a Business Files for Chapter 11 Bankruptcy?
If a company declares bankruptcy under Chapter 11, it will attempt to reorganize. Under Chapter 11, a reorganization plan is affirmed by the votes of the creditors. Management may continue to run the business, but the bankruptcy court must approve all significant business decisions.
What are the Steps in Developing a Reorganization Plan?
There are certain steps that the company must follow in developing a reorganization plan. This includes:
- The company develops a plan with committees (representing creditors, stockholders, and possibly others)
- The company prepares a disclosure statement and reorganization plan and files it with the bankruptcy court
- The Securities and Exchange Commission reviews the statement to make sure it is complete
- Creditors vote on the plan
- The Court confirms the plan
- The Company carries out the plan
What Happens to the Company’s Stock?
A company’s stock may continue to trade even after it has filed for Chapter 11 bankruptcy. Even when a company is no longer listed on a major stock exchange, their shares can still continue to trade. If the company comes out of bankruptcy, there may be two different types of common stock: the old (on the market before the company filed for bankruptcy) and the new (issued as part of the company’s reorganization plan). If the old common stock was traded, it will have a five-letter ticker symbol, ending in "Q" (indicating the bankruptcy proceedings). The new common stock will have no such distinction.
Should I Seek an Experienced Bankruptcy Lawyer?
Since bankruptcy falls under federal law, consulting a bankruptcy lawyer may be useful for those unfamiliar with the complexities of federal law. A company contemplating filing for Chapter 11 should seek an attorney to help them through the complicated process. An attorney may be best able to determine the proper and most advantageous course of action.
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