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ABI Poll: Don’t Prohibit "Liquidating Chapter 11 Plans"

A majority of respondents to a recent American Bankruptcy Institute (ABI) poll argued that companies should be allowed to liquidate under Chapter 11 of the Bankruptcy Code.

Typically, Chapter 7 is the form of bankruptcy most often employed by debtors seeking to liquidate their assets, whereas Chapter 11 is most commonly used by companies hoping to reorganize and restructure their existing debt. According to the ABI poll, 70% of respondents—63% "strongly" and 7% "somewhat"—disagreed that "liquidating Chapter 11 plans" should be prohibited and that conversion to Chapter 7 should be the only option for a business case to end in liquidation.

Companies often use Chapter 11 to liquidate assets because management remains in place during the bankruptcy process. Some experts argue that this process results in a more orderly liquidation that increases the ultimate return to creditors, while other experts argue in favor of using Chapter 7 to liquidate instead.

Conversely, in a Chapter 7 case, a business ceases operations and is liquidated by a court-appointed trustee. Only 25% of respondents—12% "strongly" and 13% "somewhat"—thought that the only option to businesses looking to liquidate should be through Chapter 7 of the Bankruptcy Code.

Chapter 11 has, in recent years, been the subject of much debate by policymakers and bankruptcy observers. Supporters of the process argue that Chapter 11 offers an effective way for companies of all sizes to restructure their debt and emerge as a going concern. Others, however, argue that Chapter 11 is too costly for small companies and leads them to liquidation. Evidence can be found to support either point of view.

To learn more about NACM's positions on the U.S. Bankruptcy Code, read over NACM's Issue Brief, available here.

Jacob Barron, CICP, NACM staff writer