Creditors’ Rights 45
Q: Ive recently heard of a company filing a Chapter 22 Bankruptcy. What is a Chapter 22 and when would someone file that?
A: Sometimes companies emerge from Chapter 11 undercapitalized; some of the reorganized companies fall back into bankruptcy and have to file Chapter 11 again. That is where the term “Chapter 22” comes from. The risks of falling back into bankruptcy will often relate to the company’s failure to completely address its problems the first time around. Although the company may have received an infusion of cash that enabled an emergence from Chapter 11, if the company failed to address its root problems it will shortly find it needing protection again under Chapter 11. In many instances, liquidation or sale is more likely in the second Chapter 11. For starters, Chapter 11 bankruptcy is expensive. It requires a significant amount of cash and staying power. The second time a company files a Chapter 11 its creditor body is worn out from the first case and a little more leery about extending the debtor favourable credit terms. The debtor will usually find credit to be a little more expensive to make up for the obvious risk that creditors are taking by doing business with the debtor. Finally, the company’s filing of the second Chapter 11 probably means that some particular root problem was simply unable to be resolved in the first bankruptcy or subsequent negotiations. Thus, it is usually more realistic and expedient to liquidate and/or sell the company and start fresh – typically without the burdens the dragged the company into Chapter 22.
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