In the bear market of 2022, the Federal Reserve's interest rate hikes coupled with a sharp drop in currency prices have caused many companies to struggle. FTX, the world's second largest crypto exchange, Core Scientific, one of the largest listed mining companies in the United States, and cryptocurrency lending institution BlockFi, have all applied for Chapter 11 bankruptcy protection in the United States without exception.
If you file for Chapter 11 bankruptcy protection, will you really go bankrupt? Why file for Chapter 11?
1. Chapter 11 of the Bankruptcy Law
The U.S. Bankruptcy Code contains a total of 13 chapters, of which "Chapter 11" refers to the "Reorganization" chapter of the U.S. Bankruptcy Code. It is also one of the chapters most commonly used by companies filing for bankruptcy protection. It is the protection of a court that gives a company time to reorganize its business or capital structure before satisfying the claims of creditors.
Therefore, a business entering Chapter 11 is not considered completely bankrupt.
2. The difference between Chapter 7 and Chapter 11
Once it falls into a state of insolvency, the main problem it faces is which bankruptcy procedure to choose to solve the problem of claims and debts. The basic choice is between liquidation and reorganization, that is, between Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code. The core difference between Chapter 7 "Bankruptcy Liquidation" and Chapter 11 "Bankruptcy Reorganization" of the U.S. Bankruptcy Code is whether the company that filed for bankruptcy still has the value of continuing to operate.
Chapter 7: Closure after Liquidation
Once activated, the court will become the bankruptcy administrator. The bankruptcy court will appoint a property administrator to close the company, sell the company's assets to pay debts, and finally dissolve the company.
After all assets are sold, any debts that remain will be forgiven.
Chapter 11: Saving the Business
The applicant enterprise is required to continue operating under its supervision. After launch, business owners need to formulate a corporate restructuring plan within 120 days, and also develop a debt repayment plan in the process. Protect the enterprise from complete disintegration and have a greater chance of regaining its vitality and vitality.
Corporate debts must be paid off in full.
3. Chapter 11 Privileges
how to apply
The application can be initiated by the enterprise or initiated by the creditor (passive application)
Under Chapter 11, a business will pay some or all of its debts out of future earnings rather than through the sale of property. To this end, Chapter 11 provides for a series of provisions to support bankrupt companies to increase their likelihood of continuing as a going concern.
Privilege One: “Automatic Suspension of Debts”
Once Chapter 11 bankruptcy protection procedures are initiated, the company has the right to temporarily stop paying debts; all creditors are prohibited from taking any measures against the company filing for bankruptcy protection unless it obtains prior approval from the bankruptcy court. This privilege buys companies time to resolve debt problems.
Privilege Two: "Implementation of Reorganization Plan"
After entering Chapter 11, the company's management rights remain in the hands of the company's management. This is also the core of what distinguishes Chapter 11 of the U.S. Bankruptcy Code from other countries' bankruptcy laws. The company's management will work with a "creditors committee" composed of creditor representatives to formulate a reorganization plan, negotiate to protect the interests of all parties, solve financial problems, and look for possibilities for continued operations.
Privilege three: "Contract renegotiation"
After entering Chapter 11 bankruptcy protection proceedings, contract terms can be renegotiated with suppliers that have already signed contracts. And can modify or refuse to perform the collective bargaining agreement signed with the union in accordance with Chapter 11, Article 1113, and renegotiate employee benefits and wages, provided that sufficient basis is provided to prove necessity. These privileges reflect the important differences between Chapter 11 of the U.S. Bankruptcy Code and bankruptcy laws in other countries, and also highlight its unique advantages in helping companies regain their vitality.
Write at the end:
In short: after the reorganization plan is implemented, if the company can provide creditors with repayments that are equal to or higher than what can be obtained according to the bankruptcy liquidation procedures, the company can exit the bankruptcy procedures and return to normal operations, successfully transform, and return strongly; if not, the company will go bankrupt. The company will enter liquidation procedures.
Chapter 11 provides a "breathing opportunity" for companies to maintain operations while formulating restructuring plans, reducing debt burdens, changing ownership, and even emerging from the brink of bankruptcy and taking off again after restoring liquidity!