Question

1. How is it possible for a company like Eddie Bauer to file for bankruptcy protection twice?

Answer 1

Hi,

Please see the answer below.

Bankruptcy and Bankruptcy protection are two different terms.

Bankruptcy means that the person or a business cannot pay off its debts anymore, hence it goes through this legal proceeding called bankruptcy. Filing bankruptcy at the federal court helps the bankrupt individual or business by immediately stopping all creditors from seeking to collect debts, until the time the debts are sorted out according to the federal law. Since business is a separate legal entity, no creditors can claim owners personal assets to pay off the business liabilities.

Once a business/ individual files for bankruptcy, it is automatically entitled to certain protections by the federal court according to the federal law. This law provides certain financial protections to the one who files bankruptcy. The protections vary depending upon the chapter of the bankruptcy code under which the debtor files.

There are various chapters under which a debtor can file bankruptcy. However, according to my research, Eddie Bauer, had filed bankruptcy under chapter 11, which is basically for corporate. Chapter 11 bankruptcy is used by businesses whose debts are very large. It is also known as Reorganization. In chapter 11, discharge of debts is the main aim for filing.

A Chapter 11 or Chapter 13 filing usually ends in the reorganization of the business’s debts, but the company can continue operating.

Chapter 11 bankruptcy allows debtor to negotiate with the creditors. Like, instead of paying off your loan within 5 years, the court might allow the debtor to make payments over the next 20 years. The motive of Chapter 11 bankruptcy is to make sure that the business continues its day to day operations, balances its expenses and income, and thus regain profitability over an extended period of time. For this, the business must formally disclose the payment plan to the court, explaining how to pay back creditors and over what period of time. After that, the creditors must approve your reorganization statement.

A confirmation hearing will takes place, where the plan for reorganization will be discussed. The court will either confirm or reject the plan. If confirmed, the corporate can continue running the business in order to pay back your creditors. Most courts require updated financial statements are validated on a periodic basis, to make sure that the business is complying with the reorganization plan.

Since, there is no specific time frame in chapter 11, and reorganization depends on the agreement among three parties, debtors, creditors and court. Hence there is no need to raise bankruptcy twice under chapter 11. Once the business proposal is not approved by court and creditors, either debtors require to submit another business proposal or need to close the operations.

Hope this helps :)