In 2010, a total of 56,282 businesses filed for bankruptcy under all applicable Chapters (7, 11, 13 and 13). The 2010 figures are proportionately higher as compared to the 36,385 business bankruptcy filings in the 1st 3 quarters of 2011. These numbers include farm bankruptcies, but these are not significant. Most of these bankruptcies are filed under Chapter 7 or Chapter 11.
When a business seeks protection under Chapter 7 of bankruptcy laws, it means that the business wants to dissolve. Chapter 7 business bankruptcy filings by state are mainly by businesses that are saddled with very heavy debt and an unprofitable product line. These businesses may not see any purpose in continuing operations. Even a business’ creditors can for it to file for bankruptcy under chapter 7.
The business has to file statements as specified by the court and then wait for the bankruptcy court to approve its petition. If the bankruptcy court approves the petition, then the creditors of the company cannot pursue collection efforts.
The court then appoints a trustee who determines which of the company’s assets can be sold and then sells off the non-exempt assets and uses the proceeds to repay the creditors. If there’s any money left over, it goes to the business owner. If the money raises is less than the total amount owed, then the creditors are not paid in full. The trustee determines different classes of creditors (priority, secured, partially secured, unsecured) and then repays the money in order of creditor-priority. Once the Chapter 7 bankruptcy process is completed, the business ceases to exist. Chapter 7 business bankruptcy filings by state are dealt with in this manner.
Chapter 11 business bankruptcy filings by state are a completely different process. Chapter 11 allows a business to reorganize its business by granting the business more time to repay its debts. Many businesses get bogged down by debt and their cash reserves go into negative territory because of the interest on loan. Such businesses may even generate profits that are eaten away by the interest burden and therefore they may want to reorganize their financial affairs. Creditors too can file for a business’s bankruptcy under Chapter 11.
These Chapter 11 businesses have to file a petition and submit a reorganization plan that gets voted on by a committee of creditors. If majority of the creditors approve the reorganization plan, then the court confirms/approves it. Once the reorganization is approved and confirmed, the business owner/s must execute the plan per its terms. If the terms are varied by default or by any other reason, the reorganization plan becomes void and the business becomes vulnerable to lawsuits.
However, if the business executes the reorganization plan per its terms, then the court enters a decree on completion and the business becomes debt-free. It can start all over again. Chapter 11 is also referred to as reorganization bankruptcy and is more positive than Chapter 7 bankruptcy.Chapter 11 business bankruptcy filings by state work in this manner.
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