290 ENTREPRENEURSHIP
of all creditors and claimholders, appointment of a trustee to supervise the process, and
a meeting of the creditors’ committee to work out a plan of liquidation and distribution.
The Bankruptcy Reform Act of 2000 added a means test to determine whether a person
was eligible to file under Chapter 7.
A Chapter 11 bankruptcy is filed for the purpose of reorganizing the firm’s debts
so it can continue to operate. The goal is to keep the business running and eventually
emerge from Chapter 11 as a healthier, albeit smaller, company. Creditors and
claimholders may prefer this form of bankruptcy if they believe they are likely to receive
more of their money than they would under Chapter 7.
Chapter 11 proceedings are often entered into voluntarily by the owners of the busi-
ness because once they file, all payments of debts and obligations are stopped until a set-
tlement can be worked out. The process calls for the appointment of a trustee, the for-
mation of a committee of general unsecured creditors, and meetings between the com-
mittee and the owners to work out a plan for reorganization. The debtor has 120 days
to file the reorganization plan and 60 more days to obtain acceptance by the committee.
The plan shows how the different classes of creditors will be treated and how the busi-
ness will operate until all the classes have had their reorganized claims satisfied. The
court must approve the final plan. If it does, the debtor is freed from the old debts and
obligated to the new debts as described in the plan.
However, many times firms do not emerge from Chapter 11 and are forced to liqui-
date under Chapter 7. Evidence suggests that, instead of forestalling liquidation and
protecting the venture, Chapter 11 hastens its end. The chances of a small firm emerg-
ing from Chapter 11 are estimated at between 10 and 30 percent. The primary reasons
for this are:- The high costs of the legal proceedings to discharge the debts
- The diversion of management’s attention—attention that may already be insuff-
cient—to legal proceedings instead of business management - Weakened bargaining power when creditors come face-to-face
- Market disruption affecting customers and suppliers because of the negative public-
ity attached to a bankruptcy filing
Sometimes it is wise for the owner to try personal persuasion and negotiation before
taking the risky step of filing Chapter 11.
A Chapter 13 bankruptcy covers individuals, primarily sole proprietorships, with
regular incomes of less than $100,000 and secured debts of less than $350,000. Its pur-
pose is to discharge the debts and protect the person from harassment by creditors. The
plan can call for an extension of credit to be paid in full over time or for a reduction in
outstanding debt with a three-year payment schedule. The Bankruptcy Reform Act of
2000 requires debtors who file under Chapter 13 to repay either $15,000 or a quarter
of their debts over five years.
Options and Bargaining Power. Although debtors and owners in bankruptcy feel
stigmatized and powerless, they often have a great deal of latitude and bargaining