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Why US bankruptcy courts are hostile to 'foreign' Chapter 11 bids

It may sound contradictory, but bankruptcy can be very beneficial for a business. Filing Chapter 11 bankruptcy can allow a company to reorganize and get its financial feet underneath it, so to speak. Business bankruptcy can also buy a company some time to find a new owner to help them out of their debt-ridden situation. Using this exit strategy can be a great option for both the insolvent company (they fulfill their exit strategy) and the new buyer (they could potentially get the company at a cheaper price).

Just look at the recent revival of Hostess as an example of this. Hostess, under a slightly modified name, still exists today -- as do their famed Twinkies -- because the business bankruptcy worked for them.

There is an increasing number of companies though that are finding the U.S. bankruptcy system difficult to navigate, and these companies all have something in common: they are "foreign." We use the quotes purposely, because these companies do indeed have offices here in the U.S. (they would have to in order to file); but they are mainly based overseas. As a result, many creditors and trustees believe the companies are acting in bad faith filing in the U.S. bankruptcy system instead of going through another country's bankruptcy system.

Both sides of the issue have solid arguments. On the one hand, it would overburden the U.S. system to allow any company in financial trouble to just set up a tiny office somewhere in the U.S., only for the entity to turn around shortly thereafter and file for bankruptcy. But at the same time, there are many "foreign" companies that are acting in good faith, and they are relying on the U.S. system to help them out in their time of need.

Chapter 11 filings by foreign entities are susceptible to legal challenges, and they could be tossed out -- so it behooves these companies to seek an experienced attorney to help them build their case and show they are acting in good faith.

Source: Wall Street Journal, "Q&A: Foreign Companies Seek Protection of U.S. Chapter 11," Jacqueline Palank, July 25, 2013

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