Chapter 22 Bankruptcy and Business: How It Could Help

Chapter 22 bankruptcy refers to the way that the bankruptcy code can help businesses by giving them two opportunities to develop a plan of reorganization, so that their doors can remain open. In this article, you will learn more about what Chapter 22 bankruptcy really means and what happened to a couple of businesses that filed for Chapter 22.

What Is a Chapter 22 Bankruptcy? 

If you are wondering why you haven’t heard about the Chapter 22 bankruptcy process, that’s because it refers to a business that files for Chapter 11 bankruptcy twice. That is where the name, Chapter 22, comes from; it is a business that, once it emerged from Chapter 11, elects to enter another bankruptcy filing for an additional Chapter 11. This means that to better understand how the bankruptcy court handles this bankruptcy process, we must examine how Chapter 11 filings work for businesses.

Chapter 11 Filings for Businesses

Chapter 11 bankruptcy is part of the bankruptcy code that provides businesses with the ability to develop a plan of reorganization. The plan of reorganization, once approved by the bankruptcy court, explains how the business will make payments to their secured lenders and unsecured creditors as well as continue to operate.

Chapter 11 bankruptcy can be voluntary, or one or more creditors can essentially force a business into filing through an involuntary petition if the business meets certain requirements. Voluntary Chapter 11 filings generally require:

  •         The voluntary petition (Form 1 of the Official Forms)

  •         Schedules completed that list the assets and the liabilities

  •         A schedule that documents the income and expenses of the business

  •         A schedule of executory contracts and unexpired leases

  •         A statement of financial affairs (balance sheets can be very helpful)

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Also, Chapter 11 bankruptcy requires the completion of credit counseling. During the credit counseling process, a debt repayment plan is formed. The business is required to submit a copy of this repayment plan to the bankruptcy court along with their certificate of completion.

The plan of reorganization must also be filed with the court. Once the plan is confirmed, payments are made, and the business continues operating.

There are many contingencies involved in a Chapter 11 bankruptcy depending on how the business is formed. Additionally, businesses should be prepared to provide balance sheets (as previously mentioned), statements of operation, cash-flow statements, and tax returns.

Generally, once the plan is confirmed, the business receives a discharge from any debt that existed before the date of confirmation. However, the business must follow through on the payment plan. However, there are exceptions to this as well.

Chapter 22: Emerged from Chapter 11 and Refiling

Why would a business that recently emerged from Chapter 11 refile and enter the colloquial Chapter 22 bankruptcy?

The quick answer is to continue to reduce their debts and keep moving forward in the hopes of remaining in business. There is no waiting period to file again.

When the business first enters the bankruptcy process, the first plan of reorganization is used to improve the way the business operates, reduces the amount of old debt, and creates new debt the business must meet to continue in business. However, the entire time, the business may continue to operate.

The second Chapter 11 filing is used if the business could not continue to operate under the first bankruptcy filing. The second filing reduces more of the debt. The business can opt to remain open. Some businesses, as you’ll learn about momentarily, decide to use the second process to liquidate their holdings.

Recent Chapter 22 Filings

Radio Shack, owned by General Wireless Operations, filed for Chapter 11 in 2015. In 2017, General Wireless Operations filed for Chapter 11 on behalf of Radio Shack again. However, General Wireless used the second bankruptcy filing to liquidate the remaining Radio Shack stores.

Two popular clothing outlets, Wet Seal and American Apparel, also have relatively recent Chapter 22 bankruptcies. Wet Seal filed for their second Chapter 11 in February 2017, less than two years after their first Chapter 11. American Apparel filed their second Chapter 11 in November 2017, just nine months after their first Chapter 11.

Learn More About Chapter 22 Bankruptcy 

If you own a business and you’re wondering if bankruptcy may be right for your business, schedule your free consultation with the Law Offices of B. David Sisson now.