Why companies file for bankruptcy – and how it protects both debtors and creditors

There are reports that Purdue Pharma is in settlement talks to resolve a number of state and federal lawsuits concerning its role in fuelling the opioid crisis. In the course of the deal, the business is expected to be filing for bankruptcy.

In the course of this time last year, Insys Therapeutics became the first manufacturer of opioids to declare bankruptcy after its settlement of US$225 million to the Department of Justice. In the previous few times, there’s been speculation that drug companies could use default to avoid accountability and save billions in litigation costs.

However, this isn’t how bankruptcy operates. Instead, according to what I’ve discovered during my time working and studying bankruptcy law, the procedure is designed for not just debtors like Insys or Purdue but also creditors like states and other defendants in opioid litigation.

Bankruptcy isn’t always ideal, and often the outcomes can be unfair. However, it’s certainly far from one of the “get out of jail free” cards that many people are afraid of.

Making the most of a dire situation

For many people, the concept of bankruptcy is stigmatized. It’s not without reason: The filing of bankruptcy usually means there are not enough funds to spread around.

However, the system makes the most of a dire situation by creating an orderly and transparent process that protects the value of the company and promotes negotiations. Reorganizations in bankruptcy for famous brands like Delta, as well as General Motors, show that it is able to bring people together and revive struggling businesses.

On the most fundamental level, The Bankruptcy Code creates an estate to gather all of the assets of the debtor into one location, classify and categorize any claims made against the debtor based on priority, and then divide the assets in accordance with preference.

How exactly those three essential actions are executed in a particular case will differ based on the type of bankruptcy case a debtor is filing and the specific details regarding the debtor.

Chapter 7 Versus. Chapter 11

Large business creditors can choose between two bankruptcy options: Reorganization or liquidation.

Chapter 7 cases are made to liquidate a company, which means it will no ever exist. Any remaining assets will be divided in two and given to creditors.

Contrarily, the other, Chapter 11 11, reorganization, permits a debtor to dispose of the majority or all its assets or make a plan for Reorganization that seeks to settle and satisfy enough creditors so that it can re-emerge as a viable business.

For instance, airline companies United, Delta, and American all applied in the name of Chapter 11 protection in the mid-2000s. They were able to clear enough debts to remain in business. Recent filings for Reorganization include those from Sears, Pacific Gas and Electric Company, and Toys R Us.

Businesses may apply with Chapter 11 to reorganize but eventually decide to close in the event that they do not agree to the plan or find an appropriate buyer. Examples of this are Bon-Ton Stores, Circuit City, and Borders.

In order for companies to make it through to the end of the tunnel, companies that want to survive, the Bankruptcy Code stipulates either the support of creditors or complete payment. If even one group of creditors with impaired credit decides against a plan, the business must undergo a grueling “cramdown” process for court approval before proceeding.

When the Chapter 11 plan of Reorganization is completed and approved, the debtor is released from bankruptcy and operates generally in a more secure situation than prior to.

Advantages to bankruptcy in the case of debtors

Bankruptcy offers at the very least two advantages to everyone who is a debtor: time and space.

When a debtor files the petition and files it, an automatic stay is placed on creditors. It acts as a pause button for any collection effort, litigation, or similar actions. Creditors are able to request the court to unwind the order in certain circumstances. However, the criteria for granting this is usually difficult to achieve.

The bankruptcy court has the power to regulate all matters pertaining to the estate of the debtor, including cases that aren’t directly connected to the bankruptcy case. The debtor could seek to have the court suspend other lawsuits not related to the bankruptcy case if they have an impact on the estate. In bringing all the parties who have a stake in the firm’s wealth to one location, a debtor is able to manage any claim against it more effectively.

Once the stay is in place deb,  the IRS is able to make use of bankruptcy to assess their issues and make the necessary adjustments to ensure success when restructuring involves deciding which contracts they would like to keep and which they want to terminate.

To avoid a dispute, smart Debtors seek an international settlement that includes the most stakeholders possible. That’s what Purdue is likely to achieve, and it will incorporate “sweeteners” to sway undecided creditors to the proposed plan.

Creditors can benefit from the benefits of

In essence, bankruptcy grants the debtors with the ability to arrange their business affairs.

Many people are unaware what they are not aware of the fact that robust protections for creditors must temper such power. It is the Bankruptcy Code that requires debtors to divulge significant information regarding their business operations and also imposes rigorous examinations of the debtor’s actions.

For example, a debtor is required to publicly disclose information about the assets it has and its liabilities. Appear to take a bankruptcy deposition with creditors and obtain the permission of the court before making any decisions that go beyond the normal business routine.

In Chapter 11, the debtor can retain possession of the estate and operate. Creditors who have concerns about the debtor’s capability to safeguard the estate’s value can ask the court to designate the position of an examiner, as well as a trustee, to manage the estate. The creditors may also seek to dismiss a case when they think that the debtor is utilizing the bankruptcy process.

The Bankruptcy Code creates a committee of creditors who are unsecured – with no assets to back their claims – that will act on behalf of claimants who will likely not be directly involved in the matter. The court could also create a committee specifically representing the tort claims of claimants when debtors have to litigate or claimants whose damages aren’t yet identified. The court in charge of the bankruptcy of Imerys, for instance, appointed plaintiffs to represent cancer patients who have lawsuits against a company that makes talc.

These and other aspects can add some fairness to an already unfair situation. The debtor might be in the driving seat. However, different stakeholders also can ensure that the company abides by the laws that govern the roads.

With these protections in place, creditors and the general public won’t have to worry about the worst in case bankruptcy is a major factor in the ongoing opioid crisis.

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