When Can a Company File a Chapter 22 Bankruptcy Case?
Chapter 11 bankruptcy cases focus on relieving a company’s debt and restoring solvency. A Chapter 11 plan allows the company to continue operating while under protection from creditors, to renegotiate contracts and leases, to sell off nonprofitable assets, to restructure debt and payment obligations and to obtain new financing. A successful Chapter 11 lets the company emerge in a far stronger position.
Not all reorganization plans produce satisfactory and lasting results. A company that finds itself in financial trouble again may have to consider a second Chapter 11 bankruptcy, commonly referred to as a “Chapter 22.” However, bankruptcy courts tend to subject these second attempts to greater scrutiny.
The need to file a second Chapter 11 may arise due to residual issues not addressed by the original Chapter 11 case or to new developments that have worsened the company’s financial circumstances. Common scenarios include:
- Undercapitalization after a prior filing
- Failed restructuring efforts
- New debts or pending lawsuits that create increased pressure
- Unexpected economic downturns
- The need to wind down slowly to maximize asset value
A Chapter 22 debtor must demonstrate that the new filing is made in good faith and is not simply an attempt to delay or frustrate creditors. Courts often look for meaningful changes in the company’s circumstances, such as new financial pressures, shifts in market conditions or problems that were not adequately addressed in the first case.
The debtor must show that the new plan is feasible. Whether the goal is renewed reorganization or an orderly wind-down, the company should be prepared to show how the second filing will achieve a different and more effective outcome. The new plan may have to call for making significant changes that were unachievable in the first one, such as selling major assets or taking drastic cost-cutting measures.
There is no strict multi-year waiting period between Chapter 11 filings. A company may file again without delay unless the prior case was dismissed for cause. However, if the court rejects the Chapter 22 petition, the debtor is generally required to wait at least 180 days before filing a new one, although judges have discretion to adjust this restriction based on demonstrated unique circumstances.
Because heightened scrutiny is to be expected, companies pursuing a Chapter 22 should take a more cautious approach. A rejected Chapter 22 can leave the company with no option but to file for Chapter 7 liquidation. Careful pre-filing planning, accurate financial disclosures and a realistic strategy for restructuring or liquidation are therefore critical. An experienced Chapter 11 attorney can advise you on devising a new reorganization plan that has the best chance of receiving court approval.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms. Schedule a free initial consultation by calling 310-271-6223 or by contacting us online.
