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What Are the Different Types of Business Bankruptcy Laws?

In the United States, businesses can file Chapter 7 or Chapter 11 bankruptcy.
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  • Written By: Florence J. Tipton
  • Edited By: John Allen
  • Last Modified Date: 26 August 2014
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The different types of business bankruptcy laws typically focus on how debt accrued from a company is either paid or forgiven. Most business bankruptcy laws may vary based on local and regional jurisdiction in the respective country, but essentially applies to an orderly handling of accumulated business debt. In the U.S., there are generally two types of business bankruptcy laws: Chapter 11 and Chapter 7. Chapter 11 bankruptcy allows a company to restructure itself while simultaneously paying off debt. In a Chapter 7, the company is absolved and debtors receive financial compensation from the sale of assets, known as liquidation.

Business bankruptcy laws determine whether or not the business meets certain qualifications for bankruptcy. To qualify for bankruptcy protection, the business is considered insolvent and unable to meet financial obligations based on the original terms of business contracts. Typically, the court appoints a trustee to ensure creditors are paid, notwithstanding each is likely to receive less money than is actually owed.

A company that is approved for a Chapter 11 bankruptcy is granted an opportunity to reorganize its financial operations while staying in business. This bankruptcy law requires that a voluntary or involuntary petition be filed in bankruptcy court. A plan is included in the petition that outlines how creditors will be paid. If the petition is approved, the company becomes known as a debtor in possession, meaning the company retains control of assets for the duration of the restructuring.

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Generally, a company may also provide a disclosure statement of assets, the value of those assets and debts. This information is typically used to determine if the restructuring plan satisfies the business interests of creditors. The court may confirm whether or not to accept the reorganization plan after all creditors have had a chance to vote on the plan.

Each creditor must petition the court as having a legal claim to receive payment from the company for past due bills. Creditors are grouped into classifications based on the type of claim held with the company. The classification usually determines when the creditor is paid and how much it receives.

Business bankruptcy laws that are related to the process for a Chapter 7 filing works differently. A company is usually required to file a petition in bankruptcy court. The difference is that a Chapter 7 leads to the company closing and ceasing all business operations. The law requires the company to provide proof that it cannot meet its financial obligations without a Chapter 7 bankruptcy.

A court-appointed trustee oversees the auctioning of assets to satisfy the debts owed by the company. If the trustee is unable to pay off the debt with proceeds from the assets, the amount owed is discharged. When debts are discharged, creditors no longer have a legal recourse to collect on the debt.

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