The Second Time Around: “Chapter 22” Bankruptcy
Bankruptcy filings are often referred to by their particular section of the Bankruptcy Code. Chapter 11 filings are for businesses and individuals who have high incomes or a lot of assets. Businesses can only file either Chapter 11 or Chapter 7 bankruptcy. Chapter 7 bankruptcy is essentially a liquidation while Chapter 11 is used more often as a reorganization.
There is really no such thing as a “Chapter 22” bankruptcy because there is no Chapter 22 of the Bankruptcy Code. However, businesses that file bankruptcy more than once are often referred to as filing for “Chapter 22.” Often, the second Chapter 11 bankruptcy is used as a gradual wind-down of the business, but not always.
Filing for Chapter 22
Many people assume that businesses and even individuals can only file for bankruptcy once, but that is simply not the case. Instead, companies can submit as many Chapter 11s as they want. In fact, there is no waiting period required for filing one petition to the next as there is for an individual who receives a discharge for his or her debts. Instead, the waiting period only applies if the Chapter 11 plan is planning to liquidate all of the assets and conduct no business once the plan is confirmed.
Being able to file more than one Chapter 11 plan means that the company can attempt to reorganize under the first scheme, and then, if the plan does not pan out, it can file again. In some situations, the first reorganization plan depends on having a certain number of sales or gaining a particular contract. If that contingency is not met, then a liquidation may be in order.
What Does a Second Chapter 11 Mean for the Business and Creditors?
When a company creates a Chapter 11 plan, it is creating new debt obligations that it can hopefully meet based on business dealings going forward. The old debt obligations are sometimes significantly altered and pared down. Some creditors end up accepting pennies on the dollar for certain receivables. However, some debts may survive the bankruptcy or last long after the business receives a discharge. If the company cannot maintain these new debt requirements, filing bankruptcy again is an option.
The second Chapter 11 can be similar to the first, which again pares down debts to hopefully manageable levels. It is more common, however, that the business uses Chapter 11 to do an extended and orderly liquidation. This is important to note because there is a common misconception that all liquidations must go through Chapter 7 bankruptcy. Instead, Chapter 11 allows a more gradual wind-down that can sometimes get creditors higher returns, but the process often takes longer.
If you have questions about these more specialized aspects of business bankruptcy, contact MaxwellDunn Law at (248) 809-1395. We have the experience you need to address these concepts and much, much more.