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Syms creditors object to Chapter 11, Chapter 7 preferable

When a company files for a Chapter 11 bankruptcy, the business will be able to continue operating. The debts of a business in Texas or elsewhere will be reorganized into more manageable payments pursuant to a court-approved plan. However, when a business files for this type of bankruptcy, the business must prove that the Chapter 11 plan is in the best interest of creditors. This means that the creditors would receive just as much as they would in a Chapter 7 bankruptcy. The recent Chapter 11 petition filed by Syms Corp. is being challenged on the basis of it not meeting the best interest of creditors test.

The proposed Chapter 11 plan permits existing shareholders to keep their stock, while unsecured creditors will be reimbursed over time without interest. There was a total of $54 million in claims for unsecured debts as a part of the bankruptcy filing. As part of the plan, the owner of the company would sell her stock to the company for $2.49 per share. She currently owns 54.7 percent of the stock, which would total $19.5 million under the proposed plan.

Some unsecured creditors of the company have challenged the proposed plan by claiming that the plan does not fulfill the best interest of creditors test. The creditors object to allowing the company to repay the debt without interest. The dissident creditors claim that the company is capable of paying their claims in full. The creditors are arguing that they would receive more from a Chapter 7 bankruptcy.

Under a Chapter 7 bankruptcy, the petitioner's assets would be liquidated by the trustee as quickly as possible in order to repay creditors. Under this type of bankruptcy in Texas and elsewhere, the company will be forced to stop operating. One of the advantages of this type of bankruptcy is that unsecured debts may be discharged. It also provides the framework that will permit the business owners to conquer existing financial issues while setting the stage for future business endeavors free from overwhelming debt.

Source: Bloomberg, "Syms, Mark Shale, Dewey, ATP Oil, Kodak, AMR: Bankruptcy," Bill Rochelle, Aug. 29, 2012

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