The Bankruptcy Act consists of three fundamental chapters: chapters 7, 11, and 13. Each chapter has a distinct applicability and function. However, they interact with one another.
a) Under chapter 11, an insolvent company or business has the option to reorganize its business and return to profitability. Kmart and World.com are among the prominent companies that have filed for chapter 11 bankruptcy. Chapter 11 bankruptcy is fairly complex, and it is always best to proceed with the assistance of an experienced attorney.
b) Sole proprietorship businesses and individuals may petition for bankruptcy under chapters 7 or 13. The proprietor must file for bankruptcy, as both the assets and liabilities of the business belong to him personally. The individual owner may petition for business bankruptcy under Chapter 7, Chapter 11, or Chapter 13. The dilemma faced by the proprietor of a business that has filed for bankruptcy is whether to close the business or start over. There is no simple response to this. Reorganization cannot create a market or increase revenue on its own. However, reorganization can free up cash from old debt service to fund ongoing operations.
Chapter 11 bankruptcy reorganization is both challenging and costly. In this chapter, the requirements to communicate with legal counsel and negotiate with creditors are crucial. In exchange for the protection of the automatic stay, the court could accept a debtor's promise to provide complete financial disclosure to creditors. Most reorganizations fail due to a lack of a concrete plan to address the issues.
In reality, businesses with a smaller capital base are extensions of the owner's talents. These do not require reorganization. For such business bankruptcies, the proprietors should file under Chapter 7. Individuals can receive a debt discharge and an opportunity to start over. Corporations are not discharged in the same manner as individuals. Chapter 7 bankruptcy can facilitate an orderly liquidation under the supervision of the trustee. Moreover, there is no cost to the shareholders. Creditors in bankruptcy proceedings are assured that they will be compensated proportionally from the sale of available assets. Companies, limited liability companies, and partnerships, however, are legal entities. They can directly register for chapter 7 or chapter 11 bankruptcy.
The bankruptcy law is exhaustive and must be studied prior to registering for bankruptcy.
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