Popular Science: Does filing for Chapter 11 bankruptcy protection mean bankruptcy?

Original Title: 《Is Filing for Chapter 11 Bankruptcy = Really Bankruptcy? NO!》

Author: 0x10EC, Snowball

In the bear market of 2022, the Federal Reserve's interest rate hikes combined with plummeting cryptocurrency prices led many companies to struggle. The world's second-largest cryptocurrency exchange FTX, one of the largest publicly traded mining companies in the U.S. Core Scientific, and cryptocurrency lending institution BlockFi, among others, all filed for Chapter 11 bankruptcy protection in the U.S.

Does filing for Chapter 11 bankruptcy protection really mean bankruptcy? Why file for Chapter 11?

1. Chapter 11 of the Bankruptcy Code

The U.S. Bankruptcy Code consists of 13 chapters, with "Chapter 11" referring to the "Reorganization" chapter of U.S. bankruptcy law, which is one of the most commonly used chapters for companies seeking bankruptcy protection. It allows companies time to reorganize their business or capital structure under the protection of the court before meeting the claims of creditors.

Therefore, companies entering "Chapter 11" are not considered completely bankrupt.

2. Differences between Chapter 7 and Chapter 11

Once a company falls into a state of insolvency, the main issue it faces is choosing which bankruptcy procedure to resolve its debts. The basic choice is between liquidation and reorganization, which corresponds to Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code. The core difference between Chapter 7 "liquidation" and Chapter 11 "reorganization" lies in whether the bankrupt company still has value to continue operating.

Chapter 7: Liquidation and Closure

• Once initiated, the court becomes the bankruptcy administrator, and the bankruptcy court will appoint a trustee to close the business and sell its assets to pay debts, ultimately dissolving the company.

• After all assets are sold, any remaining debts will be discharged.

Chapter 11: Saving the Business

• It requires the filing company to continue operating under its supervision. After initiation, the business owner must develop a reorganization plan within 120 days, while also formulating a debt repayment plan during this process. This protects the business from complete dissolution and increases the likelihood of revitalization.

• All business debts must be fully repaid.

3. Privileges of Chapter 11

How to Apply?

Can be initiated by the company voluntarily or by creditors (involuntary filing).

According to the requirements of Chapter 11, the company will pay part or all of its debts from future earnings rather than through asset sales. To this end, Chapter 11 provides a series of provisions to support bankrupt companies, increasing their chances of continued operation.

Privilege 1: "Automatic Stay of Debts"

Once the Chapter 11 bankruptcy protection process is initiated, the company has the right to temporarily stop paying debts; unless prior approval is obtained from the bankruptcy court, all creditors are prohibited from taking any action against the company seeking bankruptcy protection. This privilege buys time for the company to address its debt issues.

Privilege 2: "Implementation of Reorganization Plan"

After entering Chapter 11, the management rights remain with the company's management, which is a core distinction of Chapter 11 of U.S. bankruptcy law compared to bankruptcy laws in other countries. The company's management will work with a "creditors' committee" composed of creditor representatives to develop a reorganization plan, negotiate the protection of various interests, resolve financial issues, and seek possibilities for continued operation.

Privilege 3: "Contract Renegotiation"

After entering Chapter 11 bankruptcy protection, it is possible to renegotiate contract terms with suppliers with whom contracts have been signed. Additionally, under sufficient justification of necessity, it is possible to modify or refuse to perform collective bargaining agreements signed with unions according to Section 1113 of Chapter 11, and renegotiate employee benefits and salaries. These privileges highlight the significant differences between Chapter 11 of U.S. bankruptcy law and bankruptcy laws in other countries, as well as its unique advantages in helping businesses regain vitality.

In Conclusion:

In summary: After the implementation of the reorganization plan, if the company can provide creditors with payments equivalent to or greater than what could be obtained through bankruptcy liquidation, the company can exit the bankruptcy process and return to normal operations, successfully transforming and making a strong comeback; if not, the bankrupt company will enter the liquidation process.

Chapter 11 provides companies with a "breathing space," allowing them to continue operating while formulating reorganization plans, reducing debt burdens, and transforming ownership, and even after restoring liquidity, to emerge from the brink of bankruptcy and take off again!