We all remember “Captain Sully” and his seemingly miraculous safe landing of an airliner in the Hudson River several years ago. He maneuvered the airplane expertly at just the right angle and with just the right speed to glide it onto the water without sinking it. Chapter 11 bankruptcy has the same goal for struggling businesses – a soft landing instead of a crash.

This aspect of the United States Bankruptcy Code differs from the more familiar Chapters 7 and 13 in that Chapter 11 isn’t designed primarily to erase debt, but to restructure it. Chapter 11 protection generally is not available to individuals, but only to businesses. Many companies find Chapter 11 bankruptcy to be a valuable tool for remaining in operation despite financial strains, and often emerge from Chapter 11 stronger and more competitive.

American Airlines is the most recent high-profile company to seek Chapter 11 protection. In fact, American Airlines is the last major airline from the pre-deregulation days to file for protection. In the aftermath of 9/11 and the rise in oil prices, along with the economic downturn, airlines were hit particularly hard. Their plight, along with other industries such as auto manufacturing and entertainment, make the promise of reorganization under Chapter 11 appealing to struggling businesses.

Chapter 11 reorganization is an option for companies with expected revenues that are of greater value than the amount that could be realized if their assets simply were liquidated. A business in Chapter 11 continues to operate in its usual manner, and the company generally remains under the control of its ownership.  Usually, no trustee is appointed nor is there any direct supervision by the court. While companies can continue to do business as usual, they cannot enter into any major expansions or alter their scope of business in any significant manner.

The centerpiece of a Chapter 11 plan is the development of a payment plan. The business discloses all of its assets and liabilities to the court, and suggests a plan by which its creditors can be paid, at least in part. Sometimes it is necessary to cancel or modify certain contracts, or for a company to curtail operations to some extent by reducing sites of operation, employees or product lines. Unlike other forms of bankruptcy, creditors in a Chapter 11 case have significant power to affect the terms of a proposed plan, although ultimately the decision rests with the bankruptcy judge.

Other than creditors, other groups that may be affected by a Chapter 11 plan are employees and vendors. A restructuring plan can require that labor agreements and supply contracts be modified or rejected if such decisions would be beneficial to the business and its creditors. Such a move makes it possible for a business to renegotiate more favorable terms with its union employees and set new prices for materials and services supplied by vendors.

Once a plan is in place, the company must adhere to its terms. If problems arise, a trustee could be appointed, the plan could be adjusted or the company could cease operations. Generally, though, a well-conceived reorganization plan will make it possible for a company to regain its footing, steady its position in the marketplace, and move forward to the benefit of its creditors, employees, suppliers and the general public.

Posted by Jennifer on December 13, 2011 at 2:39pm.

Check out this video to learn about the complexities of filing for bankruptcy.

Posted by Jennifer on August 19, 2010 at 4:52pm.

From: LongIslandBankruptcyBlog.com

Almost 1 in 4 U.S. homeowners is drowning in mortgage debt. The Wall Street Journal recently reported that the percentage of homeowners who own more on their mortgage than their property is worth recently swelled to 23%, or just over 10.7 million households, according to First American CoreLogic.

Of that number, approximately 5.3 million households hold mortgages that are worth 20%+ than their home’s value. That number will rise in the coming months. The first wave of foreclosures has passed, but sub-prime mortgages involving balloon payments or adjustable rates will trigger another wave when consumers holding such rates fail to qualify for conventional loans.

Americans’ priorities have shifted. While in the past, making a mortgage loan was paramount, TransUnion recently reported that Americans now prioritize car payments and credit card payments above mortgage payments. Lisa Epstein recently reported that consumers recognize the need for a vehicle to get to and from work, while quoting Ezra Becker, Director of Consulting and Strategy for TransUnion, who concluded that “consumers recognize that their credit cards are their primary purchasing vehicles in this economy.” Many Americans attitudes toward home ownership has changed following the housing crisis over the past 2 years, and as a result many have become delinquent on their mortgage loans. For those homeowners who are drowning in mortgage debt and prefer not to go into foreclosure, there is the option of bankruptcy.

Neither does a consumer any favors in terms of saving their credit rating, but bankruptcy does offer some flexibility.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also called straight or total bankruptcy or liquidation, allows debtors to keep certain property that is considered exempt under the U.S. Bankruptcy Code.  It is this type of bankruptcy that may seem most attractive for a homeowner who has large amounts of unsecured debt and is willing to walk away from his/her home.  The downside, here, is that the bankruptcy will remain on your credit history for 10 years, limiting your credit options and indicating the precarious nature of your creditworthiness.

The upside is this:  Chapter 7 bankruptcy will discharge most types of unsecured debt, such as credit cards and installment loans.  Lienable debts, such as real estate mortgages and security interests for car loans, survive the bankruptcy.  So, too, do student loans.  However, the bankruptcy trustee will sell those assets – hence, the term liquidation – to repay creditors and provide you with a fresh start.

Chapter 13 Bankruptcy

Chapter 13, or individual reorganization, has been likened to a payment plan and it is the preferred method for those who do not want to lose their assets.  It remains on your credit history for 7 years, similar to other negative credit items.  If a debtor has a regular income and limited debt, Chapter 13 will allow it to keep property, such as a mortgaged house or car, that the debtor would otherwise might lose. In Chapter 13, the court approves a repayment plan that allows the debtor to pay off a default during a period of three to five years, rather than surrender the property.

The decision to file bankruptcy is serious and should be made with much consideration.  While it might provide a debtor with a life jacket during a crisis, bankruptcy can have consequences for a decade.

Posted by Krystyna on February 1, 2010 at 5:14pm.