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Business Bankruptcy

Business Bankruptcy is the filing of Chapter 7 or Chapter 11 by corporations and partnerships. On the filing of a Chapter 7 petition, the court appoints a trustee. The trustee' primary duty is to sell the assets of the bankruptcy estate, and then make distributions to creditors. Businesses, unlike individuals, cannot have any property exemptions, so all assets are to be sold and distributed.

The bankruptcy law set a priority for each kind of debts. First, administrative and legal expenses are paid. Then come secured creditors that may have their collateral returned to them. Bondholders, and other unsecured creditors follow next, in case there is money left for them to receive a payment. Stockholders generally don't receive anything in return for their investment. However, if creditors are paid in full, stockholders will receive a notification and be able to file claims for anything left over.

Once the case is filed, in most Chapter 7 bankruptcy cases, the debtor's business operations are stopped, although, in some cases, the court permits the trustee to operate the business. Also, filing the petition triggers the automatic stay that prohibits creditors from initiating or continuing any actions to collect the debts they are owned.

Chapter 7 case closes when all possible assets were fully distributed among creditors. However, discharge of debts is not granted if a corporation or partnership files the case.

When a petition for Chapter 11 bankruptcy is filed, the U.S. Trustee appoints one or several committees to represent the interests of creditors and stockholders. The committee(s) together with the debtor company develop a plan of reorganization. The plan must be accepted by all the creditors and shareholders, and confirmed by the court. However, even if creditors or shareholders vote to against the plan, the court can still confirm the plan if it finds that the plan treats creditors and stockholders fairly.

The debtor develops the plan in cooperation with the committees of creditors and shareholders. The U.S. Trustee may appoint another committee to represent a distinct class of creditors, such as secured creditors, employees or subordinated bondholders. In fact, the debtor has an exclusive right to work out and file the plan within 120-day period. If it fails to do so, any party in interest may draw up and file the reorganization plan.

Despite the fact the plan had been confirmed by the court, it is possible to modify it, under the conditions that modified plan would legally comply with Bankruptcy Code and be reconfirmed by the court. Cancellation of the plan is also possible, only if the confirmation of the plan was archived by fraud.

The discharge of the debt is usually automatically granted upon confirmation of the plan, provided it is reorganization plan. Discharge does not take place if it is a liquidation plan that is filed.