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  Reorganize the Future

The ups and downs of the economy have resulted in many companies seeking a fresh start under Chapter 11 bankruptcy proceedings. This route, taken by Kmart, Enron and WorldCom, can help businesses that feel they could be profitable if they could get some relief from their debts.

Current Bankruptcy Law
    A wide-ranging law that made major changes to the country's bankruptcy laws was signed by President Bush on April 20, 2005 and went into effect on October 17, 2005. Under the Bankruptcy Abuse Prevention and Consumer Protection Act, it became more difficult for individuals to file for Chapter 7 bankruptcy, which wipes out most unsecured debts - including credit card debt. Lawmakers said the changes, which prohibit some individuals from filing for bankruptcy altogether, were necessary because the number of filings were at historic highs at that time
    In addition to the major changes in consumer bankruptcy, the Bankruptcy Act also contains numerous changes for business bankruptcy cases, including revised rules for reorganizing under Chapter 11. It also created a new chapter of the Code, Chapter 15, which addresses cross-border insolvency.
    Total business bankruptcy filings fell 50 percent from calendar year 2005 to calendar year 2006. Nonbusiness filings fell 70 percent in the same time period, according to the U.S. Courts Web site.

Chapter 11 immediately freezes all financial claims against the company and stops lawsuits and collection activities.

Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It's different from Chapter 7, which involves liquidating or selling off the assets of a company closing its doors. Chapter 11 allows a business to continue day-to-day operations.

Here are some of the major steps involved in the Chapter 11 process, which can take many months or longer to complete.

Step 1. The appropriate forms are filed in court and the company is provided immediate relief - called an "automatic stay" -- from creditors. A bankruptcy filing is not likely to affect business. A company continues to pay employees and provide benefits. It's also able to keep dealing with suppliers and customers so that it can continue earning money.

Step 2. After filing, the bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they are owed money by the company.

Step 3. The company proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the company is proceeding in good faith, the exclusive period may be extended.
Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any claims that are disputed. Once the total value is determined, the company can see if its financial reorganization plan is economically viable. Sometimes, litigation over the priority or handling of creditors arises.

Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a financial reorganization strategy and the company distributes payments according to that plan.

Unlike Chapter 7 bankruptcy, debts are not simply absolved by filing Chapter 11, although debts are likely to be reduced or paid off over a period of years. And although you can keep operating, your reputation may be hurt with customers, suppliers and employees.

If your company is thinking about filing Chapter 11, you need a clear understanding of what's involved because this is a complex proceeding. Consult with your tax adviser to plan your most beneficial bankruptcy option.

Types of Bankruptcy and Characteristics

Chapter 7	Corporation goes out of business and a trustee is appointed to sell its assets. Proceeds are distributed to creditors and most remaining debts are wiped out. Chapter 7 is also available to partnerships and individuals.
Chapter 11	Company continues operating and negotiates a court-approved repayment plan with creditors. Chapter 11 is typically used by businesses but is available to individuals.
Chapter 12	Available only to family-owned farms and family fishing businesses.
Chapter 13	Individuals with regular income keep certain assets and pay debts under a court-approved plan. Typically takes 3 to 5 years. Not available to corporations but can be used by some businesses that are operated as sole proprietorships.

If you have questions about this article topic or other general business-related questions, please contact Small Business Manager Jim Gante, CPA at 717-757-6999 or 800-745-8233. You may also use the comments option below to send Jim an email.

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