What is Chapter 10

Chapter 10 was a type of corporate bankruptcy filing that was retired due to its complexity; its key parts were revised and incorporated into Chapter 11. Chapter 10, more formally known as "Chapter X," listed the processes and procedures for bankruptcies involving corporations. It was used by the courts and corporations to determine whether a company merited reorganization and restoration to long-term viability or whether it should be shut down and liquidated. The last year for Chapter 10 was 1978, when it was eliminated by the Bankruptcy Reform Act and its and most useful ideas were rolled into Chapter XI, which later became the modern Chapter 11.

Breaking Down Chapter 10

One important element of Chapter 10 was that it required the bankruptcy courts to always act in the best interest of shareholders. Such a directive served to make the process of determining whether liquidation or reorganization was the better option, and then enacting either plan, both expensive and complex. Chapter 10 also gave such wide-ranging powers and responsibilities to court-appointed trustees that company management was essentially displaced. Since management was not involved the process of deciding whether to reorganize or liquidate, trustees or other interested parties that were appointed by the court had to swear that they had no personal interest in the outcome as a condition of their service. This ideas was known as "disinterestedness."

Chapter 10 vs. Chapter 11

Chapter 10 was regarded as so complex, time consuming, and potentially expensive that it acted as a deterrent to declaring bankruptcy for corporations. It rules were wide-ranging and especially detailed, so much so, that corporations often chose Chapter XI instead (as the precursor to Chapter 11 was known). In a Chapter 10 bankruptcy, management is displaced, and a court-appointed manager or trustee oversees the reorganization or restructuring process. This is generally not the case in a Chapter XI/Chapter 11 filing. Chapter XI offered the advantage of not removing a company's management, which meant it could have a larger role in executing a reorganization. It also allowed management to have more of a say in how creditors would be repaid and how assets would be liquidated. Because it is relatively simpler, a Chapter 11 bankruptcy filing is preferred over a Chapter 10 by debtors and their lawyers, and creditors.

Chapter 10 History

Chapter 10 was introduced as part of the Bankruptcy Act of 1898 as a blueprint for reorganizing financially troubled companies. It was later incorporated into the Chandler Act of 1938.