What Is The Different Types Of Bankruptcies – After the World Health Organization declared COVID-19 a pandemic, many states imposed lockdowns, ordering non-essential businesses to close and limiting public interaction. The lockdowns have severely restricted shopping and travel, causing many businesses, particularly in the restaurant, hospitality and entertainment industries, to struggle economically.
Thousands of companies have filed for bankruptcy, including big names like Neiman Marcus, Hertz, J.Crew and Brooks Brothers. But these familiar businesses aren’t necessarily going away. Bankruptcy can allow a company to restructure its debts and try again.
What Is The Different Types Of Bankruptcies
Bankruptcy is a legal process in federal court that allows businesses to restructure their debts and make repayment plans with creditors. If it is not possible for a business to continue to operate, bankruptcy allows it to liquidate its assets and distribute them among creditors.
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Because individuals and companies file for Chapter 7 bankruptcy when they have financial difficulties, debtors cannot pay all their creditors. The court appoints a trustee to sell the debtor’s assets and distribute the proceeds to creditors. The bankruptcy code gives priority to secured creditors, who are first in line for payment, followed by unsecured creditors.
Secured creditors are creditors whose loans to the company are secured by collateral, such as mortgages on real estate or secured interests in other company assets. Many secured creditors are banks.
Unsecured creditors are creditors without a security interest in the company’s property. These may include banks, suppliers and bondholders. The trustee pays them out of the remaining assets after they have paid off the secured creditors. The shareholders are last on the list if there is anything left.
Bondholders have a better chance of getting their money back from the company than shareholders because these parties have a debtor-creditor relationship. Bonds represent a company’s debt that the company has agreed to repay with interest. Shareholders are not creditors. They are the owners of the company. They earn more profits than bondholders in good times and greater risks in bad times.
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A Chapter 11 filing stops debt collection, giving the company time to create a plan to become profitable again by cutting costs and increasing revenue. Chapter 11 bankruptcy can help companies with significant debts reorganize and reorganize, giving them a second chance. But the performance also has negative consequences. For example, the stock prices of companies that file Chapter 11 often fall afterward.
According to legal services provider Epiq, commercial Chapter 11 filings increased 48 percent in May 2020 compared to May 2019, while filings in September 2020 increased 78 percent compared to September 2019. In the first six months of 2020, total filings were around 26 increased. percent compared to the same period of 2019.
As part of the reorganization, the debtor can accept or reject his performance contracts (contracts that have not been fully performed or not performed). There are specific issues regarding what happens to intellectual property if the debtor rejects an intellectual property agreement in which he is a licensee. Our research on intellectual property and bankruptcy can help troubled companies and creditors understand the protections that special contractual clauses provide in bankruptcy.
As bankruptcies increase due to the pandemic, companies are trying to avoid them by renegotiating loan agreements or finding new financing. Most loan agreements require borrowers to post collateral to secure their obligations to the lender and enter into negative covenants. Negative covenants are legal promises that restrict the debtor from performing specific actions. But many negative covenants contain “baskets” (dollar exclusions from negative covenants in loan agreements designed to allow borrowers some flexibility to continue operating) that can be used by sophisticated borrowers to create a “trap door.” The trapdoor maneuver was used to effectively restructure the borrower’s debt to the detriment of senior or pre-existing debt holders, such as the transfer of assets to subsidiaries that are not subject to loan covenant restrictions.
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In 2016, retailer J.Crew was in desperate need of additional funding. The Company’s secured credit agreement contains a negative covenant that restricts investments in subsidiaries. J.Crew used three baskets in that deal to restructure its debt and obtain additional financing.
Both lenders and borrowers should analyze their creditworthiness to identify potential weaknesses. See our study on Strengthening Security Protection to learn how lenders can limit the actions of borrowers against unrestricted subsidiaries to prevent their borrowers from following J. Crew’s example, and how borrowers can reduce the risk of default on their pre-existing credit facilities can reduce:
Bankruptcy can be a fresh start for some companies, but it is a complex legal procedure with advantages and disadvantages. Before filing for bankruptcy court, it is important to understand the consequences.
Learn how distressed companies and non-debtors can benefit from the security and efficiency these provisions provide, saving all parties time, money and effort at critical times.
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This site uses cookies. By continuing to browse this site, you agree to our use of cookies. Bankruptcy is a legal procedure that allows individuals, businesses and other entities to discharge debts when they are no longer able to pay them. The primary purpose of bankruptcy is to give debtors a fresh start, with the secondary function of paying back as much as possible to creditors without further burdening the debtor.
In a bankruptcy court proceeding, after examining the assets and liabilities of operationally insolvent individuals and businesses, the judge and the court decide whether to discharge the debts. If the judge and trustee decide to discharge the debt, the individual or business that filed for bankruptcy is released from the requirement to discharge it.
Before a debtor files for bankruptcy, an individual must compile a comprehensive list of all debts, assets, income and expenses. This helps the individual and anyone else involved in a potential bankruptcy filing (including the eventual court) get a clear picture of the financial landscape involved.
In addition, bankruptcy courts require applicants to receive credit counseling from a federally approved counseling agency within 180 days of filing. This usually takes less than two hours over the phone or online, and is done to ensure that all possible bankruptcy alternatives (such as debt consolidation and debt settlement) have been adequately explored. At the end of the counseling session, a certificate is issued, which must be included in the bankruptcy case.
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These bankruptcy proceedings usually involve the payment of unsecured creditors through the liquidation of the debtor’s assets, which are not exempt from liquidation under non-state or federal law.
Assets generally considered exempt include your home, car used for work, retirement savings, Social Security benefits and Social Security checks. These types of assets are protected from liquidation to pay debts.
However, non-exempt assets include cash, funds held in bank accounts, funds held in the stock market, jewelry, collectibles, and any second homes or cars. These types of non-exempt assets would be subject to liquidation in a Chapter 7 proceeding, with the proceeds used to pay creditors.
Chapter 13 bankruptcy is filed by individual debtors who have incomes higher than the median for the state they live in, and for people whose incomes are too high, Chapter 7 can be filed for relief.
A Guide To The Different Types Of Bankruptcy
This type of bankruptcy procedure involves working out a 3- to five-year repayment plan that requires some creditors to forgive other debts. When the repayment plan ends, the remaining debts are paid off.
Chapter 11 bankruptcy is mostly used by businesses, although some people use it when their debts exceed the limits set by Chapter 13. .
Businesses from large multinational corporations to relatively small partnerships use Chapter 11 to pay off debts over time without selling assets or ceasing operations.
Regardless of the type of bankruptcy, after a mandatory credit counseling session, the debtor files a bankruptcy petition in the federal bankruptcy court in the county of the debtor. This starts an automatic stay that prohibits creditors and collection agencies from further contacting or pursuing the debtor.
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This information is then forwarded to a court-appointed trustee, often a bankruptcy attorney, who oversees and directs the entire process while maintaining contact with the official and requesting additional information as needed.
When submitting an application, the applicant details his average income for the previous six months. If this income is below the median income for his state, he can file for Chapter 7 bankruptcy protection.
However, if this income is above average, the applicant must fill out a form detailing monthly income and expenses to determine if they have the means to pay off part of the debt within three to five years. If the means test shows that the debtor is able to do so, he files for Chapter 13 bankruptcy protection.
Regardless of the type of bankruptcy, after the mandatory credit counseling session, the debtor files for bankruptcy in the federal bankruptcy court of the county of the debtor. This starts to become an automatic lien that frustrates creditors and collection agencies.