Running a business can be both a rewarding and difficult experience. When the economy changes, it can substantially affect a business owner's ability to run their business. Sometimes, the only way for the owner to get their company out of a tough situation is to file for business bankruptcy.
On Tuesday, a bankruptcy judge allowed American Airlines to pay a severance package to its chairman and CEO. This ruling sets the stage for American to exit Chapter 11 bankruptcy and merge with US Airways. The decision still requires the approval of American's creditors.
American filed for Chapter 11 bankruptcy 18 months ago. They also tried to negotiate with their employee unions to lower operating costs. US Airways and American announced a merger at the end of last year.
The issue holding up the merger was the severance package for the executives. The Bankruptcy Code prevents any severance package given to a CEO to be more than ten times the amount given to the average employee. Generally creditors must approve any reorganization or merger plans.
There are two types of business bankruptcy. One liquidates the business to pay off creditors. The other creates a debt reorganization and repayment plan. Both can help a business get out of a tough financial situation and can provide the business a fresh financial start, like in the case of American Airlines.
One of the major benefits of filing for bankruptcy is that all creditors actions are stopped immediately. This includes liens and repossession. A debt reorganization plan will generally decrease interest payments and penalties or fees are reduced or eliminated.
No matter the situation, if a business is considering filing for bankruptcy, they should consider their options to determine whether it is a viable option. In addition, they might qualify for various form of bankruptcy, so it is a good idea to seek out advice to understand what their best option is.
Source: The Sacramento Bee, "Bankruptcy judge removes obstacle to American-US Airways merger," Curtis Tate, June 4, 2013