This post is part of a series of posts entitled First Considerations for the Financially Distressed Business. For a comprehensive list of articles contained in this series, click here.
As previously stated, this publication focuses on the needs of a business who wishes to restructure their debts and continue operating. Therefore, the main focus will be on chapter 11 bankruptcies.
However, there are various types of bankruptcies available to potential debtors. A brief overview of each type is discussed below.
A. Chapter 7: Liquidation
A chapter 7 case is commonly referred to as a straight liquidation case and is the most common type of bankruptcy case filed. This is mainly due to its wide availability—it is available to individuals, partnerships, limited liability companies or corporations. Once a chapter 7 bankruptcy case is filed, the debtor’s business operations generally cease and everything owed by that person or entity as of the date of the bankruptcy filing becomes part of the “bankruptcy estate.” The trustee is then tasked with collecting and liquidating any non- exempt assets and distributing the proceeds to the creditors in accordance with the bankruptcy priority scheme.
B. Chapter 11: Large Reorganization
A case filed under chapter 11 of the Bankruptcy Code is commonly known as a “reorganization” case. While available to individuals (and, sometimes the only reorganization option for individuals whose debt exceeds the maximum debt limits for chapter 13), it is most often used by incorporated businesses to reorganize their business or financial affairs. Upon the filing of a chapter 11 case, the debtor becomes the “debtor in possession.” As a general rule, the debtor in possession continues to operate its business subject to the protection and control of the bankruptcy case. The debtor in possession may attempt to develop a plan of reorganization under which it promises to pay a portion of its debts out of future profits. Alternatively, the debtor in possession may sell its business as a going concern and pay its creditors from the sale proceeds under a plan of liquidation.
C. Chapter 12: Family Farmers Reorganization
Chapter 12 bankruptcy is a relatively new addition to the Bankruptcy Code. It is designed to be used by “family farmers” or “family fisherman” with “regular annual income.” This chapter is mainly available to an individual, an individual and spouse, a corporation or a partnership; however, the debtor’s aggregate debt cannot exceed $10,000,000.00. It allows a financially distressed family farmer and fisherman to form and carry out a plan to repay all or part of their debts.
D. Chapter 13: Repayment Plan
A case filed under chapter 13 of the Bankruptcy Code is generally known as a “wage-earner plan” case. This type of case is typically filed by consumer debtors with regular incomes; however, it is also available to small sole proprietorships. It is not available to companies. Under a chapter 13 case, the debtor develops a plan under which he or she pays a portion of his or her debts over three (3) to five (5) years. The statutory debt limits for a chapter 13 case are adjusted every three (3) years. Currently, chapter 13 cases may be filed only by individuals having total secured debts of less than $1,257,850 and total unsecured debts of less than $419,275.