Chapter 15 Bankruptcy – The Basics

There are several ways to file for bankruptcy. Most people have probably heard of Chapter 7, Chapter 13, and Chapter 11 bankruptcies. But one of the less commonly known types of bankruptcy is Chapter 15. One reason Chapter 15 bankruptcy isn’t well known is that it doesn’t apply to most business and consumer borrowers. In this guide, we’ll explain why this is the case, as well as how Chapter 15 bankruptcy works and why it exists.

Chapter 15 Bankruptcy Explained 

Most people haven’t heard of Chapter 15 bankruptcy. That’s because it’s fundamentally different from the more common types of bankruptcy, such as Chapters 7, 11, and 13. These bankruptcies help individuals and businesses deal with unmanageable financial liabilities.

Chapter 15 vs. More Common Bankruptcy Cases

For example, Chapter 7 bankruptcy allows individuals to discharge most of their unsecured debts. Chapter 13 bankruptcy allows people to reorganize their debt. Specifically, the Bankruptcy Court will restructure the filer’s debts and create a repayment plan to make it easier for the borrower to pay back some of their debts. Chapter 11 bankruptcy is like Chapter 13 bankruptcy in that there’s a restructuring plan. But it’s different in that it’s more often used for businesses.

Chapter 15 & Foreign Bankruptcy Proceedings

In contrast to Chapter 7, 11, and 13 bankruptcies, Chapter 15 bankruptcy isn’t for the reorganization, discharge, or liquidation of debt. Instead, it’s a set of rules and procedures that determine how the United States court system will handle foreign bankruptcy proceedings that involve assets in the U.S. This is why Chapter 15 bankruptcy cases are sometimes known as "Ancillary and Other Cross Border Cases.” 

What often happens is that the main bankruptcy proceeding takes place in the foreign filer’s home country. But when the legal issues or assets involve the United States, the borrower will also start a Chapter 15 bankruptcy proceeding in the U.S. A popular place to file a Chapter 15 bankruptcy petition is the U.S. Bankruptcy Court for the Southern District of New York (S.D.N.Y).

There are five main reasons why Chapter 15 bankruptcy is part of the U.S. Bankruptcy Code:

1. It helps facilitate cooperation among U.S. and foreign courts when a bankruptcy proceeding involves property and debts that exist in multiple countries.

2. It creates more legal stability and understanding for entities that conduct international business.

3. It improves the efficiency of cross-border bankruptcies. This includes protecting the financial concerns of interested parties.

4. It ensures that a filer’s assets are assessed at their full economic value.

5. It assists companies that have financial struggles.

As you can imagine, Chapter 15 bankruptcy is one of the least-used types of bankruptcy in the U.S. And for several decades, these types of cases were rare enough that Chapter 15 wasn’t necessary.

History of Chapter 15

Chapter 15 is a relatively new addition to the U.S. Bankruptcy Code. It was created in 2005 when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Before Chapter 15 existed, Section 304 of the U.S. Bankruptcy Code addressed international bankruptcies. 

Then companies started expanding where they do business. This increased the number of bankruptcy cases that involved the laws of two or more countries. So there was a growing need for a more efficient and flexible set of rules. These rules would allow the U.S. Bankruptcy Courts to better assist foreign bankruptcy courts and protect the financial interests of their participating parties.

In creating Chapter 15, Congress looked to the United Nations Commission on International Trade Law's (UNCITRAL) Model Law on Cross-Border Insolvency. This UNCITRAL Model Law, along with Section 304 of the U.S. Bankruptcy Code, helped form the basis of Chapter 15. There are 48 countries that have similar laws to improve the efficiency and effectiveness of international bankruptcy proceedings.

The Ins and Outs of Chapter 15 Bankruptcy 

The steps in a Chapter 15 bankruptcy proceeding vary by the case and its applicable legal issues, the nature of the debtor’s assets, and the laws of the participating foreign bankruptcy court. But the typical Chapter 15 case involves an insolvent foreign company filing a petition to request the assistance of a U.S. bankruptcy court. Part of this petition involves proving that a foreign bankruptcy proceeding exists.

Foreign Main vs. Nonmain Proceedings

After receiving the Chapter 15 bankruptcy filing, the bankruptcy court decides if the foreign bankruptcy proceeding is either a:

• Foreign main proceeding, meaning the foreign bankruptcy proceeding is occurring in the same country where the filer has its main interests. This is often where the company filing for bankruptcy has its primary place of business, has its registered office, or where it’s legally domiciled. 

or

• Foreign nonmain proceeding, which means the foreign bankruptcy proceeding is taking place in a country where the filer conducts regular economic activity, but not where its main interests are.

This distinction matters because of the automatic stay. An automatic stay provides a temporary pause on all the debt collection activities of the creditors. This is an invaluable benefit that can protect the foreign debtor’s assets. If the filer gets recognized as a foreign main proceeding, it’s much easier for them to get the automatic stay.

If the insolvent entity or its foreign representative files for Chapter 15 bankruptcy, the U.S. Bankruptcy Court may authorize a trustee or examiner in the foreign country. This individual is appointed to act on behalf of the U.S. bankruptcy estate.

Benefits of Chapter 15

Additional benefits and rights of a Chapter 15 bankruptcy proceeding include:

• Prohibiting the discrimination of foreign bankruptcy creditors in a bankruptcy proceeding.

• Requiring that sufficient notice goes to all creditors in U.S. bankruptcy cases, even if the creditor is from another country.

• Providing additional assistance to foreign representatives to better handle the filer’s insolvency proceeding. This help will be provided as long as the laws of the foreign country don’t violate U.S. law.

• Allowing foreign creditors to participate in U.S. bankruptcy proceedings, including filing a claim in a U.S. bankruptcy case.

If a foreign court’s bankruptcy laws aren’t as comprehensive as those in the United States, U.S. Bankruptcy Courts may offer additional relief to foreign nationals who file Chapter 15 bankruptcy. 

One thing to keep in mind is that the U.S. bankruptcy judge and court officials will do what they can to cooperate as much as possible with the foreign bankruptcy court and its laws. In practice, this means the U.S. bankruptcy court will defer to many actions and decisions made by the foreign bankruptcy court. 

Remember, the purpose of Chapter 15 isn’t to apply the laws or public policy of the United States to another country and its insolvent borrowers. Instead, it’s to promote cooperation between U.S. and foreign courts. The result is that in Chapter 15 cases, the U.S. bankruptcy judge will try to interfere as little as possible in the affairs of the foreign nation.

When To Pursue Chapter 15 Bankruptcy 

If you’re reading this, there’s a good chance that you don’t need to use Chapter 15 bankruptcy. Most likely, you’ll need to decide whether to file Chapter 7 or Chapter 13 bankruptcy. But if you have an international business or consider another nation as your home country, there’s a chance Chapter 15 bankruptcy could come into play. Other ways Chapter 15 might apply to your bankruptcy case include:

• You’ve filed bankruptcy in a country other than the U.S., but you also have assets in the U.S. 

• You want to file bankruptcy in the U.S., but you have assets in one or more foreign countries.

• You believe the bankruptcy laws in the U.S. might be more beneficial to you than the bankruptcy laws in your home country.

Because of the complexity of the bankruptcy laws in the United States and other countries, don’t forget to consider talking to a bankruptcy attorney. They can help identify potential issues based on your unique situation. For instance, before reading this article, you may not have known Chapter 15 even existed in the U.S. Bankruptcy Code. 

Let's Summarize... 

Chapter 15 is not a well-known or well-utilized part of the U.S. Bankruptcy Code. But it’s an important provision because it promotes cooperation between U.S. bankruptcy courts, foreign representatives, and foreign bankruptcy courts handling bankruptcy cases filed outside the United States. Chapter 15 also helps protect the value of the debtor's assets and attempts to assist financially troubled companies.

With more streamlined laws in place for handling international bankruptcy matters, Chapter 15 can help establish a better legal foundation for international trade, investment, and business. The United States joins almost 50 other nations that have enacted similar laws in response to UNCITRAL’s recommendations for handling cross-border insolvency cases.