When a company or an individual has no abilities to pay back the debts they can use such retrenchment strategy as bankruptcy. In this case, the company or an individual, but not a creditor, will be considered as an initiator of bankruptcy.
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Bankruptcy can be discussed as the effective strategy for avoiding significant debt obligations because there are a lot of factors on which the process of declaring bankruptcy depends, and it can be a real opportunity for a company or an individual to avoid irreversible consequences and to preserve the definite resources.
The principles of the American bankruptcy law and the five types of bankruptcy are provided in the United States Code. These types are determined according to the peculiarities of the procedure of bankruptcy (liquidation or reorganization) and with references to the company, municipality or an individual as the owner of the resources. Thus, they have definite similarities and differences which should be analyzed properly.
The five types of bankruptcy are named in relation to the chapters of the Code. Therefore, the main types are Chapter 7, Chapter 9, Chapter 11, Chapter 12, and Chapter 13. Chapter 7 Bankruptcy is the liquidation of the individual or company’s property when there are no possibilities to pay back the debts or it is impossible to obtain the agreement with a creditor (David, 2008).
Declaring bankruptcy according to Chapter 7, the debtor liquidates his assets with referring to a trustee who can sell the assets, and the debtor cannot continue his business activities.
Chapter 9 Bankruptcy differs from Chapter 7 Bankruptcy in applying not to individuals or companies, but to municipalities. According to this chapter, only cities, towns, villages and the other municipalities can declare their bankruptcy. This type of bankruptcy differs from the previous one in the possibility to reorganize the strategy for the development in relation to the repayment plan. It is important that there are states in the USA in which the declaration of bankruptcy by municipalities is prohibited (David, 2008).
Chapter 11 Bankruptcy is similar to Chapter 9 Bankruptcy in the possibility of the reorganization according to the court-approved plan. Chapter 11 makes accents on the companies or commercial enterprises’ reorganization (David, 2008).
In this case, it is opposite to Chapter 7 Bankruptcy because of allowing companies to continue their business activities according to the reorganization plan which includes a lot of aspects of the organization’s reducing debts and discharging contracts. Thus, to get the opportunity for reorganizing, the debtor should fill the petition for protection.
Chapter 12 Bankruptcy is developed specially for providing the debt relief to family farmers. Their debt can be less than $1.5 million (David, 2008). This chapter can be discussed as the particular aspect of the Chapter 13 Bankruptcy.
According to Chapter 13 Bankruptcy, the debtor is inclined to continue his business activity, but this individual has no opportunities to pay back his debts in the current situation. When he has the regular income he can propose the plan for overcoming the situation and approve it in the Court. It is possible to declare Chapter 13 Bankruptcy and make the necessary payments to the creditors with the help of a trustee.
The main types of bankruptcy are Chapter 7, Chapter 9, Chapter 11, Chapter 12, and Chapter 13. These types have a lot of similarities as it is in Chapter 7 and Chapter 13 Bankruptcy, Chapter 9 and Chapter 11 Bankruptcy, Chapter 11 and Chapter 13 Bankruptcy, but the chapters’ peculiarities are caused by the differences in them and by the procedures of declaring bankruptcy and their conditions.
David, F. R. (2008). Strategic management: Concepts. USA: Prentice Hall.