There are six types of bankruptcy filings under the Bankruptcy Code. Figure BLG 1-1 provides a brief description of the circumstances when each type of filing may be appropriate.
Figure BLG 1-1
Types of bankruptcy filings under the Bankruptcy Code
Chapter 7
Provides for the orderly liquidation of the assets of the debtor for the satisfaction of some or all of its liabilities to its creditors
Chapter 9
Provides protection to a municipality from its creditors while it renegotiates a plan to adjust its debts
Chapter 11
Allows for reorganization of the business and a "fresh-start," most likely with reduced liabilities, or in certain cases an orderly liquidation
Chapter 12
Provides for the adjustment of debts of a family farmer with regular income and limited debt
Chapter 13
Provides for the adjustment of debts of an individual with regular income or a qualified small business
Chapter 15
Ancillary and Other Cross-Border Cases
Allows for cross-border insolvency cases to be governed on a uniform and coordinated basis
Generally, a qualified debtor can file for bankruptcy on a voluntary basis by filing a petition in the Bankruptcy Court (the “Court”). Debtors may be domestic or foreign entities. Holders of claims against a debtor (e.g., creditors) can commence an involuntary bankruptcy case under Chapters 7 or 11 if certain criteria are met.
This guide focuses primarily on bankruptcy proceedings under Chapter 11 of the Bankruptcy Code, which is the most common type of filing for businesses. Bankruptcy proceedings under Chapter 11 are within the scope of ASC 852-10, Reorganizations. See BLG 3.21 for discussion of the application of ASC 852-10 for foreign enterprises during bankruptcy.
In February 2020, the Small Business Reorganization Act of 2019 (SBRA) created a new Subchapter V within Chapter 11. Initially, only businesses with noncontingent debt of less than $2,725,625 could qualify under the SBRA, although the CARES Act increased that limitation to $7,500,000 through March 27, 2022, at which point it reverted to the original amount. Subsequently, in June 2022, the Bankruptcy Threshold Adjustment and Technical Corrections Act was enacted to reinstate the $7,500,000 limitation. The limitation was increased retroactively to March 27, 2022 and will remain in effect until June 21, 2024. Subchapter V is intended to allow qualifying debtors to avail themselves of the benefits of Chapter 11 protection while incurring lower costs, fewer reporting requirements, and less administrative burden during the process. As the ability to use Subchapter V is based on the amount of noncontingent debt, larger businesses with significant contingent liabilities (e.g., litigation) but little or no traditional debt may qualify for Subchapter V.
Bankruptcy proceedings under Chapter 7 of the Bankruptcy Code should follow the guidance in ASC 205-30, Liquidation Basis of Accounting, and are not in the scope of ASC 852-10. The liquidation basis of accounting, including associated reporting considerations, is discussed in BLG 6.
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