Professor Richard M. Alderman, Associate Dean at the University of
Houston Law Center, who is known to many as "The People's Lawyer", answers your most common questions. If you have a question pertaining to the law in Texas, please e-mail Richard at peopleslawyer@www.law.uh.edu. This page answers your questions on Bankruptcy
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A. Many people do not understand that there are several types of bankruptcy. The type most people think of is when a company, or a person, just gives up what they have and gives it to their creditors. This is called a Chapter 7 Bankruptcy. In the case of a business, this means the company goes out of business.
There is a second type of bankruptcy, however, that is designed to let the person, or the business, continue to do business and have time to get out from under its debt. In the case of a person this is called a Chapter 13; in the case of a business this is called a Chapter 11.
Under a Chapter 13 Bankruptcy, a person files a petition in Bankruptcy Court agreeing to turn over his income to the court so it can be distributed to his creditors. In exchange, the court prevents the creditors from trying to collect from the debtor. This way the debtor has time to pay off his debt. After a period of time, usually three years, the debtor generally has paid off all of his debts in full.
A Chapter 11 Bankruptcy is similar to a Chapter 13 except it is for a business. Under a Chapter 11, a company that is having financial problems can file a petition asking the Bankruptcy Court to let it propose a plan to pay off its debt over a longer period of time. While the debtor is preparing its plan and during the time that it pays, the creditors cannot take steps to collect their debts.
The objective of both a Chapter 11 and a Chapter 13 is to permit the debtor to stay in business and have time to get back on his feet. While the Chapter 13 or Chapter 11 is pending, it will be business as usual.
The business that you read about must have filed a Chapter 11 Bankruptcy. This means that it is now operating under the "protection" of the Bankruptcy Court. There is no reason why you should not deal with the business just as you did in the past. Many successful businesses, for example, Continental Airlines and Toy-R-Us, have survived a Chapter 11 Bankruptcy and continue to prosper.