Artistic Framing, a business with $120,000 of unsecured debt, needs to file for bankruptcy, but wants to continue in business. Discuss what chapter of the Bankruptcy Code should be used, and discuss the effect of the 2005 amendment to the Code on the proceedings

Answer 1

If Artistic wants to continue in business, it should file under a reorganization chapter (Chapters 11 or 13 ) rather than a liquidation chapter (Chapter 7). Although its purpose is to rehabilitate the debtor through reorganization, Chapter 13 is available only to individual debtors with a regular source of income. It is not available to businesses. Chapter 11 is the appropriate chapter for Artistic. Artistic becomes the debtor in possession and, in effect, serves as trustee. In 2005, Congress amended the Code to speed up the process of reorganization for businesses. Once the bankruptcy petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditors. The next stage is to develop a plan of reorganization that provides for the payment of debts and the continuation of the business. For the first 120 days (which the court can extend up to 18 months), the debtor has the exclusive right to propose a plan. If the debtor fails to file a plan, or if the court rejects it, then creditors and shareholders can develop their own plan. Some bankruptcy lawyers argue that it makes reorganization much more difficult because creditors no longer have to be patient, waiting years for payment. Instead, they can force liquidation at the end of the 18 months.