Chapter 7 bankruptcy. Businesses that can reorganize and potentially become profitable again choose Chapter 11 bankruptcy. Chapter 12 bankruptcy is reserved for businesses run by family farmers or fishermen.
Chapter 7 Corporate Bankruptcy
Chapter 7 is a bankruptcy procedure undertaken by failed businesses that have overwhelming business debt and no hope of operating in the future. A court-appointed trustee liquidates, or sells, the businesses assets and distributes the proceeds to the creditors. Creditors are paid in accordance with the priority of their claims. Priority claims, such as administrative bankruptcy costs, are paid first. Next, secured claims, or those claims secured by collateral, are paid, and then unsecured claims.
While individuals filing under Chapter 7 are entitled to have most unsecured claims discharged, there is no discharge in a corporate Chapter 7 bankruptcy. Once the business assets are liquidated and proceeds distributed, the debts technically remain.
While it is not legally required for an insolvent corporation to file Chapter 7 bankruptcy, businesses that wish for a trustee to oversee liquidation often take this route. This limits allegations of corporate liquidation malfeasance and has the effect of discouraging creditor suits.
Chapter 11 corporate bankruptcy is used by businesses to eliminate corporate debt and reorganize a failing business. While some Chapter 11 businesses are able to successfully return to a profit-making enterprise, others must eventually liquidate under Chapter 7.
A court-appointed trustee evaluates and manages the bankruptcy case while the businesses continues to operate. The business is known as a "debtor in possession." The trustee appoints creditor and stockholder committees that work out a reorganization plan with the business to repay its creditors. The business must detail its income, assets, liabilities, expenses, and its plan to repay creditors in its bankruptcy petition. Upon filing, an "automatic stay" of creditor collection and lawsuits is entered. Creditors seeking payment under the reorganization plan must file a claim with the court or risk having their claims discharged.
Within twenty to forty days of filing, the trustee holds a creditors' meeting. At this time, the business must disclose and discuss its income, assets, and repayment plan. Final court approval of the plan is made at a confirmation hearing. If the case is not confirmed, the court may convert the case into a Chapter 7 liquidation bankruptcy.
Chapter 12 Corporate Bankruptcy
Chapter 12 bankruptcy is a streamlined bankruptcy procedure for family farmers or fishermen. Before filing, the petitioner must complete credit counseling and must not have had a bankruptcy petition dismissed in the 180 days prior to filing. In order to receive bankruptcy protection, the petitioner must demonstrate stable and regular income. The petition must include a financial affairs statement that details current income, expenses, assets, liabilities, executory contracts or unexpired leases. The automatic stay of creditor collection action also applies in a Chapter 12 bankruptcy case.
The court assigns a trustee to evaluate and manage the case. The trustee liquidates business assets and distributes proceeds to the creditors in accordance with the reorganization plan. Priority claims, such as bankruptcy proceeding costs, must be paid in full. Creditors with secured claims are paid next. Unsecured claims are paid last and may remain unpaid following discharge.
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