US Chapter 7 of the Bankruptcy Code

US Chapter 7 of the Bankruptcy Code

Instructions/Descriptions

US Chapter 7 of the Bankruptcy Code

Businesses most often file for bankruptcy under Chapter 11 or Chapter 7 of the Bankruptcy Code. While Chapter 11 historically has proven more useful to large businesses, changes under recent federal laws may make it a good option for small businesses during the COVID-19 outbreak.

A standard filing under Chapter 11 involves agreeing with creditors on a proposed reorganization plan, which will be confirmed by a court if enough creditors accept it. This allows the business to continue operating, which would not be possible if the business filed for bankruptcy under Chapter 7. The seven largest unsecured creditors of the business will form a creditor committee to monitor the operations of the business and help develop the reorganization plan. The creditor committee process can become costly, since it may involve retaining attorneys and experts to investigate the business. Also, a reorganization plan may not be finalized for over a year after the debtor files, due to the complexities of negotiating with creditors. The cost and inefficiency of Chapter 11 thus have made it unattractive to many small business owners in the past.

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Sometimes a small business will file for bankruptcy under Chapter 7, although this chapter is more commonly associated with individual bankruptcy. After the business files, a bankruptcy trustee will liquidate its assets and distribute the proceeds among creditors. However, a Chapter 7 discharge is not available to businesses that have shut down already. Most small businesses that have closed because of the COVID-19 outbreak thus will not qualify for this form of relief.

Chapter 7 may be more attractive to sole proprietors than other business owners. This is because sole proprietors who file under Chapter 7 can receive a discharge for personal debt as well as business debt. Thus, they can greatly reduce their overall debt burden and rebound more quickly from the COVID-19 outbreak. A sole proprietor with a service-oriented operation may even be able to keep the business open by relying on their own labor, while the bankruptcy trustee sells the assets of the business. However, the bankruptcy trustee has the discretion to decide whether a business can stay open in these circumstances. A trustee sometimes may allow a business to stay open if it has liability insurance, or a trustee may not allow a business to stay open at all.

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Bankruptcy under Subchapter V of Chapter 11 sometimes resembles a Chapter 13 bankruptcy. Subchapter V eliminates the creditor committee requirement in Chapter 11 and allows a bankruptcy trustee to monitor the debtor’s payments. Thus, the owners retain greater control over the business. Subchapter V also provides more efficient relief. A debtor submits their proposed reorganization plan within 90 days of filing for bankruptcy. It requires approval from a judge but not from creditors. A judge will approve a plan if it is fair and equitable, and if it seems at least reasonably likely to succeed. Often, a plan allocates the disposable income of the debtor toward repaying creditors over the next three to five years. To remain eligible for this relief, the business must keep up with plan payments during the applicable time.

These benefits come with certain specific requirements. For example, the business must submit a wide range of financial disclosures and reports throughout the process. The managers of the business must attend a series of meetings, including a debtor interview, a scheduling conference, and a Section 341 meeting of creditors. The business also must keep up with taxes and insurance, and it must allow inspections of its property, books, and records with reasonable notice.

The Consolidated Appropriations Act of 2021 (CAA) included additional amendments to the Bankruptcy Code in an attempt to make bankruptcy more equitable during the coronavirus pandemic. The CAA allows small business debtors under the SBRA to request a 60-day extension to perform obligations arising under a lease of non-residential property, such as paying rent, if the debtor has experienced a material hardship due to COVID-19. This is in addition to the 60 days already afforded under section 365(d)(3) of the Bankruptcy Code. Debtors may also take 210 days, rather than 120 days, to decide whether to accept or reject non-residential property leases, with the option to extend this deadline by an additional 90 days with the permission of the bankruptcy court.

Respond to the questions below, select the Forum link, then click on Create Thread and type in your posting.  To respond to a minimum of 2 classmates, first, click on one of their postings, read it, and then select REPLY.  Please type your NAME in the Subject field.

1. Many small businesses throughout the U.S. have struggled to survive the challenges posed by the novel coronavirus. If a business is overwhelmed by debt, its owners may decide to file for bankruptcy. Do you know of any business or company that closed down or filed bankruptcy because of suffering during the pandemic? Explain by discussing an example and what you learned through this article that must be done when under Bankruptcy?
2. The word “bankruptcy” has historically always been associated with something bad or something wrong caused by business mistakes or lack of money. What are benefits you consider as good about business filing for bankruptcy? Discuss why by supporting your answer with an example(s) of how it can work out for a business?
3. Under Chapter 7 a creditor committee must monitor the operations of the business and help develop the reorganization plan. The creditor committee process can become costly, since it may involve retaining attorneys and experts to investigate the business. Businesses must always think ahead about how to pay for issues when they arise. If you are a small business owner, how would you pay for the attorney fees and still keep up with taxes and insurance?

US Chapter 7 of the Bankruptcy Code

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