Business Bankruptcy

By: EconomyWatch Content   Date: 1 December 2009

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Business bankruptcy codes are different in the US, as compared to most of the European nations. In the US, companies have access to a debt reorganization plan after bankruptcy declaration. However, European laws have no such alternative arrangements for bankrupt companies.

Business Bankruptcy in the US

In the US, if a company goes bankrupt, it can file a petition in the court under any of the following two chapters (laws):

  • Chapter 7: Filing a Chapter 7 petition leads to liquidation of assets. A company opts for Chapter 7 if its management believes that it is not possible to repay the debt even in the near future. In this course of action, the bankruptcy court designates a trustee to liquidate assets and use the proceeds to pay off the debt. If the debt exceeds the liquidation proceeds, then the personal wealth of the company owners faces threat. By opting for Chapter 7, a company gets rid of debt within a few months and can start afresh. 

  • Chapter 11: Unlike Chapter 7, Chapter 11 calls for a reorganization plan to grant debtor more time to repay the loan amount. Here, the company files a petition in court, along with a reorganization plan. The court and the creditors analyze the financial potential of the company in coherence with the plan. If both the players agree, the reorganization plan comes into action. This plan is a draft that details on how the debtor is planning to repay creditors. Here the company owner(s) continue to have control over their business and assets.

Given how frequently businesses opt for Chapter 11, financial experts condemn the US Bankruptcy Code as weak and inefficient.

Business Bankruptcy in the UK

In the UK and most other European nations, business bankruptcy codes are stricter than those in the US. Here, a company compulsorily goes into liquidation after declaring insolvency. A bankruptcy petition can be filed by the company owners or any of the creditors. Mostly, the UK court holds the top management liable for the lack of financial resources. This is followed by a change in the company’s directors and top executives.

With the change in the global financial scenario, most European countries are planning to include a debt reorganization clause in their native laws.


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