Business Bankruptcy Code: Chapter 11 and Chapter 13 Bankruptcy.

When a business considers liquidation because of untenable creditor problems, overheads and cash flow it is then worth considering an alternative. The U.S. Bankruptcy Code provides an opportunity for the business to restructure its finances and to continue to operate under the umbrella of Bankruptcy Protection.

The code allows time for strategic planning of individual debtors such as sole traders and partnerships who owe secured and unsecured debts to extend their payment terms beyond the creditors terms and conditions of trading. This is because many businesses who get into difficulties are themselves victims of extended credit terms with their own customers who may be higher up the trading chain. That leads to a key company that has major difficulties such as General Motors, Ford, Worldcom etc. When a major company folds it can often affect hundreds of suppliers and thousands of retailers who have high quality and profitable businesses but who need time to reorganise themselves when the market suddenly and sometimes dramatically changes course.

When this happens a company needs to write a cash flow plan and a plan that explains how the company intends to pay its creditors with extended terms and recover back to healthier trading conditions with minimum impact on jobs loses. The plan has to be accepted and confirmed by a court and must be acceptable by the majority of creditors. If this is achieved then the courts decision to accept the business plan is binding upon the minority of creditors who voted against the revised payment terms.. And by taking this vital action a business can avoid liquidation where the creditors and employees are all adversely affected by company closure. The key to having a solution is having extra time based on a credible plan.

When sole proprietors, partnerships, LLC’s and corporations choose to reorganize themselves because of financial and trading difficulties under the Bankruptcy Code they are doing so through a Chapter 11 Bankruptcy Plan.

The first thing to do is to devise a credible plan that can be filed with the insolvency court. The plan will illustrate ownership interests and debts; a profit/ loss summary drawn up by an accountant should suffice. It will also illustrate which debtors and creditors that are affected and those who are not affected and which fixed assets are proposed to be sold. For example many companies who own real estate or intellectual property may choose to sell their property to an investment company and lease it back or pay royalty fees to release equity for debt payment and restructuring costs. The plan has to be confirmed by a court and once this happens then the business owners and creditors have a firm-fixed legal position and their rights that are specified in the plan cannot be altered.

The Chapter 13 bankruptcy plan is used when a person who is a debtor has a source for a regular income can submit a plan to the court that explains how debt is going to be paid through regular but reduced installments to create extra time using a more practical schedule. If the plan is accepted and confirmed by a court debts are made in accordance with the plan and once the debts have been fully paid-off then the debtor may make an application to be discharged from bankruptcy.

Effectively the plan is used as a legally binding money management tool that plans a workable monthly budget against the debtors future income. If the plan is offered in good faith and is both plausible and workable and is offered in the best interests of the creditors by giving them priority then it has a very good chance of being accepted by the courts.