written on February 26, 2009 by Tim Richards
WEEK ONE : A customer just filed for bankruptcy. Will my customer survive the bankruptcy process?
Whether your customer will survive the bankruptcy process depends on many factors, all of which cannot be discussed here. Generally speaking, whether your customer survives depends on whether it can be "reorganized" into a profitable company or sold as a "going concern" to another company. To explain this more fully, a brief discussion of the two main types of bankruptcy cases is necessary.
Generally speaking, a company will file for either Chapter 7 or Chapter 11 bankruptcy. In a Chapter 7 bankruptcy, a company throws in the towel and admits that it is not economically viable. As part of this process, the company notifies all of its creditors that it has filed for bankruptcy. A trustee is then appointed who, generally speaking, gathers all of the company's assets, sells the assets and distributes the proceeds to the company's creditors. Secured creditors (for example, a bank with a mortgage on the company's factory) get paid first out of the proceeds of the sale of their collateral. After all of the secured creditors who have an interest in the collateral are paid in full, any excess proceeds from the sale of the collateral are distributed to unsecured creditors on a pro rata basis (i.e., divided proportionately among the creditors according to the amount of their individual debts). If a secured creditor is not paid in full out of the proceeds of the sale of its collateral, the secured creditor becomes an unsecured creditor for the purposes of this unpaid remainder. For additional information, visit the "Chapter 7 - Liquidation Under the Bankruptcy Code" page at the U.S. Federal Courts website. A link is provided under Resources.
In a Chapter 11 bankruptcy, a company believes it is economically viable and attempts to survive lean times by "reorganizing" its debts before the company becomes unsalvageable. The bankruptcy law provides the debtor with several tools to reorganize its debts and obligations. An explanation of these tools is outside the general scope of this article. Generally speaking, in a Chapter 11 case either the debtor or a creditor will propose a "plan of reorganization" explaining how creditors will be paid and the debtor's debts and obligations will be adjusted. The plan must satisfy a number of criteria before it can be "confirmed" by the bankruptcy court. For example, the debtor's creditors must approve the plan through a voting process. If a plan cannot be confirmed, the bankruptcy court normally converts the case to a Chapter 7 liquidation. For additional information, visit the "Chapter 11 - Reorganization Under the Bankruptcy Code" page at the U.S. Federal Courts website. A link is provided under Resources.
All articles are for discussion purposes only and are not intended as legal advice for any particular situation or intended to form an attorney/client relationship.