Just as individuals can fall on financial hard times, businesses and corporations can experience financial setbacks as well. When a business is failing financially, there are several options available. The first is a Chapter 7 bankruptcy. A chapter 7 bankruptcy for businesses is much like a Chapter 7 bankruptcy for individuals. Essentially, the business’s assets are liquidated, or sold off to pay debts. The assets can be dived up or another businesses may decide to purchase the failing company in an attempt to turn it around. Another option is a Chapter 11 bankruptcy. Unlike a Chapter 7 bankruptcy which can be filed by an individual or a business, a Chapter 11 is for businesses only. A Chapter 11 bankruptcy provides businesses with a chance to restructure their financial situation while continuing to operate. A Chapter 11 bankruptcy is usually preferable as the business can survive it. Here’s a look at Chapter 11 bankruptcy and how it has changed.

Chapter 11 not what it used to be

Prior to 2005, businesses filing for Chapter 11 had a virtually unlimited amount of time to restructure and exit bankruptcy. The federal bankruptcy laws were amended in 2005 making it much more difficult for businesses to restructure and exit bankruptcy without changing ownership. The amendments to the bankruptcy laws were in large part driven by landlords tired of tenants that were involved in lengthy Chapter 11 bankruptcies.Many are now wondering if the amendments were too dramatic and have pushed the pendulum too far in the opposite direction. Under the new bankruptcy laws, many businesses filing for a Chapter 11 bankruptcy simply can’t restructure in the allotted time and end up liquidating in the end.

A study of 45 large bankruptcies in the retail industry highlights the issue. Out of 20 bankruptcies prior to the 2005 amendments, half were able to restructure, 35% liquidated, and 15% were sold. Of the 25 that took place after the amendments, only 12% were able to restructure, nearly half liquidated, and 40% were sold.With such bleak outcomes, the lenders that finance these businesses during bankruptcy are only issuing short term loans which compounds the problem. Finally, because Chapter 11 isn’t as promising as it once was, more and more businesses are putting off filing even as the value of the business continues to decrease. Ultimately stakeholders lose more when the business does go under. Many experts are pushing for new amendments that would place Chapter 11 bankruptcy requirements somewhere between where they are now and where they used to be.

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