Bankruptcy and Liquidation Accounting Primer White PaperVW Staff
Bankruptcy is a legal procedure for dealing with the debt problems of individuals and businesses. This procedure is covered under Title 11 of the United States Code (the Bankruptcy Code or the Code). The Code is a federal statute, enacted on 1 October 1979, as Title 11 of the United States Code by the Bankruptcy Reform Act of 1978. Under the jurisdiction of the US District Court, the Bankruptcy Court (the Court) generally is responsible for cases filed under the Code.
Types of Bankruptcy
There are six basic types provided for under the Bankruptcy Code. The cases are traditionally given the names of the chapters that describe them. These types are listed below with a brief description of who can avail themselves of the respective chapters:
The vast majority of cases are filed under the three main chapters of the code, which are Chapter 7, Chapter 11 and Chapter 13. The primary function of a Chapter 7 bankruptcy proceeding is to liquidate the debtor’s nonexempt assets and distribute the proceeds to the debtor’s creditors. The primary function of a Chapter 11 and Chapter 13 proceeding is to reorganize the debtor’s financial affairs through a court-approved plan. A qualified debtor can file for bankruptcy on a voluntary basis or the creditors can commence an involuntary bankruptcy case under Chapters 7, 11 or 13 if certain criteria are met.
Through bankruptcy, most of a debtor?s debts are eliminated, thereby providing the debtor a fresh start. Although each chapter differs from the others in significant ways, there are important elements that are common to all bankruptcy cases such as automatic stays and discharges. A Chapter 11 filing allows the business to continue its operations and also provides a means for companies to liquidate through the Chapter 11 process.
This publication addresses Chapters 7 and 11 filings. In addition, this publication also addresses the accounting for entities that are in the process of liquidation, whether through a Chapter 11 or Chapter 7 bankruptcy proceeding or other forms of liquidation. An entity in liquidation is no longer a going concern and instead follows liquidation basis accounting.