A Review of the Rite Aid Bankruptcy: 5 Critical Chapters of The Bankruptcy code in Us Business Law

rite aid bankruptcy

In the complex world of U.S. business law, understanding the nuances of bankruptcy is crucial for both companies and legal professionals. The recent case of Rite Aid’s bankruptcy offers a compelling case study to explore this area in depth.

This blog will delve into five key chapters of the Bankruptcy Code, shedding light on how each chapter applies to the Rite Aid bankruptcy scenario.

From liquidation and reorganization to the intricate details of court proceedings, we’ll break down the essential components that define bankruptcy in the United States.

Read on as we review the Rite Aid bankruptcy through the lens of these critical legal frameworks.

US Laws on Bankruptcy for Businesses

Bankruptcy is a legal process that allows individuals or businesses unable to meet their financial obligations to either eliminate or restructure their debts. The primary goal of bankruptcy is to offer a fresh start to the honest but unfortunate debtor while ensuring fair treatment to creditors.

In the United States, bankruptcy rules are mainly controlled by federal law, known as the “Bankruptcy Code.” Some bankruptcy-related laws are located in different sections of the United States Code. They are part of US business laws governing the running of businesses.

For instance, bankruptcy crimes are detailed in Title 18 (Crimes). The tax effects of bankruptcy are explained in Title 26 (Internal Revenue Code), and the rules about creating and managing bankruptcy courts are found in Title 28 (Judiciary and Judicial Procedure).

Bankruptcy laws in the United States help people and businesses who cannot pay their debts. These laws provide a way for them to either erase their debts or create a plan to repay them over time. The main goal is to give honest debtors a fresh start while ensuring fair treatment for creditors.

Understanding these laws can help those in financial trouble make informed decisions.

Filing for bankruptcy in the United States involves several key steps, each requiring careful preparation and adherence to legal guidelines.

Before this process, it’s often beneficial to seek legal advice to navigate the complexities of bankruptcy law and ensure compliance with all legal requirements. Here is a simplified overview of the process:

1. Credit Counseling: Before filing for bankruptcy, individuals must complete a credit counseling course from an approved agency. This session helps determine if there are viable alternatives to bankruptcy.

2. Gathering Financial Documents: Collect all necessary financial documents, including income records, tax returns, bank statements, and a list of assets and liabilities. These documents will be used to complete the required bankruptcy forms.

3. Filing the Petition: The next step is to file a bankruptcy petition with the appropriate bankruptcy court. This petition includes detailed information about the debtor’s financial situation, including a list of assets, liabilities, income, and expenses. Along with the petition, the debtor must pay a filing fee or apply for a fee waiver if they cannot afford it.

4. Automatic Stay: Once the petition is filed, an automatic stay goes into effect. This legal order stops most collection activities, including lawsuits, wage garnishments, and calls from creditors, providing temporary relief to the debtor.

5. Meeting of Creditors: Approximately 20 to 40 days after filing, the debtor must attend a meeting of creditors (also called a 341 meeting). Here, the bankruptcy trustee and creditors can ask questions about the debtor’s financial affairs and the submitted documents.

6. Debt Repayment or Liquidation: Depending on the type of bankruptcy filed (e.g., Chapter 7 or Chapter 13), the process will either involve liquidating non-exempt assets to pay off creditors (Chapter 7) or setting up a repayment plan (Chapter 13). In Chapter 11, primarily used by businesses, a reorganization plan will be created.

7. Financial Management Course: Before receiving a discharge of debts, the debtor must complete a financial management course from an approved provider.

8. Discharge of Debts: If all requirements are met, the bankruptcy court will issue a discharge order, releasing the debtor from personal liability for most debts and giving them a fresh financial start.

For U.S. businesses, declaring bankruptcy can have significant implications. On one hand, it can provide a lifeline, allowing a company to restructure its operations, renegotiate debts, and emerge more financially stable. This can preserve jobs and maintain the business as a going concern.

On the other hand, bankruptcy can damage a company’s reputation, making it harder to attract investors and secure credit in the future.

Additionally, the process can be costly and time-consuming, involving detailed court oversight and strict compliance with legal procedures.

Generally, bankruptcy can offer relief and a path to recovery, but it also comes with challenges that can affect a business’s long-term viability and market position.

How much does it cost to file for bankruptcy?

The average cost of hiring a lawyer for bankruptcy was $1,170 as at 2013. Alternatives to using a lawyer include filing on your own, known as filing pro se, which involves completing at least sixteen different forms, hiring a petition preparer, or using online software to create the petition.

The U.S. Bankruptcy Court also charges fees that vary based on the type of bankruptcy. As of 2016, the filing fee is $335 for Chapter 7 and $310 for Chapter 13. Those who face financial difficulties can apply to pay in installments.

There are extra fees for adding creditors after filing ($31), switching from one chapter to another ($10-$45), and reopening the case ($245 for Chapter 7 and $235 for Chapter 13).

A Review of the Rite Aid Bankruptcy Case

Rite Aid, one of the biggest pharmacy chains in the U.S., filed for bankruptcy in October 2013, due to billions in debt, falling sales, and over a thousand lawsuits alleging it filled illegal prescriptions for painkillers(opioids). According to the New York Times, the company filed for Chapter 11 bankruptcy in New Jersey.

Its main creditors were McKesson Corporation and Humana Health. Rite Aid had secured $3.45 billion to keep its stores open and continue serving customers during the bankruptcy process.

Rite Aid, with over 2,200 drugstores in 17 states, had been losing money for years and had been closing many unprofitable stores to try to improve its business.

Rite Aid’s bankruptcy was aimed at reducing its debt burden and restructuring its business to better compete in the retail pharmacy sector.

Rite Aid emerged from bankruptcy with a plan to improve its financial health and operational efficiency, aiming to strengthen its position in the competitive retail pharmacy market.

The 5 Chapters of The Bankruptcy code in Us Business Law

There are different types of bankruptcy, each designed for specific situations, such as Chapter 7, Chapter 11, and Chapter 13.

Chapter 7

Chapter 7 involves liquidating assets to pay off debts. Liquidation in a Chapter 7 bankruptcy is the most common type. It means a trustee is chosen to gather a debtor’s property that isn’t protected, sell it, and give the money to creditors.

Most Chapter 7 cases end up being “no asset” cases because debtors cannot usually keep necessary property, so there are no assets left to pay creditors.

Chapter 9

Chapter 9 bankruptcy is a special type of bankruptcy that is only available to municipalities, such as cities, towns, and counties. Unlike Chapter 7, which focuses on liquidating assets, Chapter 9 aims to help these public entities reorganize their debts and continue operating.

Some well-known examples of municipalities that have filed for Chapter 9 bankruptcy are Orange County in California, which went through the process from 1994 to 1996, and the city of Detroit, Michigan, which filed for bankruptcy in 2013.

Chapters 11, 12 and 13

Chapter 11 is typically used by businesses to reorganize. Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 involves a more complex process of reorganization. This lets the debtor keep some or all of their property and use future earnings to pay off creditors.

Chapter 11: Individuals can file for Chapter 11, but it’s rare. It allows for reorganization and continuation of business operations.

Chapter 12: This is like Chapter 13 but is only for “family farmers” and “family fishermen.” It offers more favorable terms for debtors compared to Chapter 13. Chapter 12 was set to expire in mid-2004 but was renewed and made permanent in late 2004.

Chapter 13: This is also for reorganization but is commonly used by consumers, allowing them to keep their property and pay off debts over time using future earnings. Consumers typically choose either Chapter 7 or Chapter 13 when filing for bankruptcy.

Conclusion

In conclusion, bankruptcy laws in the United States serve a crucial role in providing individuals and businesses with a legal framework to manage financial distress and seek a fresh start.

From Chapter 7 liquidation to Chapter 11 reorganization, these laws offer various avenues for debtors to resolve their financial obligations while balancing the rights of creditors.

The evolution and application of bankruptcy laws reflect ongoing efforts to maintain economic stability and fairness, ensuring that debtors can rehabilitate their finances while contributing to a functioning economy.

FAQs: US Laws on Bankruptcy

What are the Chapters of bankruptcy?

The three commonly used bankruptcy codes are Chapters 7,11 and 13.

What are the main reasons for bankruptcy in the US?

Common reasons that people file for bankruptcy include loss of income, high medical expenses, an unaffordable mortgage, spending beyond their means, or lending money to loved ones.

References

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