Legal Definitions - Chapter 22

The term "Chapter 22" is not a formal legal chapter in the U.S. Bankruptcy Code. Instead, it is a colloquial or slang term used within legal and business circles to describe a specific, challenging situation: when a company files for Chapter 11 bankruptcy a second time, relatively soon after having completed a previous Chapter 11 reorganization.

To understand "Chapter 22," it's helpful to first understand Chapter 11 bankruptcy. Chapter 11 allows businesses, and sometimes individuals with significant debt, to reorganize their finances and operations under court supervision. The goal is for the debtor to emerge from bankruptcy as a viable, profitable entity, having restructured its debts and operations.

A "Chapter 22" scenario arises when a business successfully emerges from an initial Chapter 11 reorganization, but then, relatively soon after, faces new financial distress or fails to sustain its recovery. This necessitates another Chapter 11 filing because the debtor has become insolvent again or is once more threatened with insolvency. It signifies that the first attempt at restructuring, while completed, did not provide a lasting solution to the company's underlying financial problems.

• Example 1: Retail Chain Facing Market Shifts

  Trendsetter Apparel Inc., a national clothing retailer, filed for Chapter 11 bankruptcy in 2019 due to declining sales from increased online competition and a shift away from brick-and-mortar shopping. They successfully reorganized, closed unprofitable stores, renegotiated leases, and emerged from bankruptcy in late 2020. However, by mid-2022, persistent supply chain disruptions, rapidly rising inflation impacting consumer spending, and a failure to adequately pivot to e-commerce led to another severe cash crunch. Unable to meet their restructured debt obligations, Trendsetter Apparel Inc. was forced to file for Chapter 11 again. This second filing would be colloquially referred to as a "Chapter 22."

  How this illustrates the term: The company completed an initial Chapter 11, but new market pressures and operational failures led to a quick return to insolvency, requiring a second Chapter 11 filing.

• Example 2: Manufacturing Company with Supply Chain Issues

  Precision Parts Co., a specialized manufacturer of automotive components, filed Chapter 11 in 2018 after losing a major contract and struggling with outdated equipment. They reorganized by securing new clients, investing in modern machinery, and streamlining production, emerging from bankruptcy in 2020. Despite these efforts, by 2022, unprecedented global supply chain disruptions, a severe shortage of critical raw materials, and a sudden increase in energy costs made their operations unprofitable again. Facing imminent collapse, Precision Parts Co. had no choice but to file for Chapter 11 for a second time. This situation is a classic "Chapter 22."

  How this illustrates the term: After successfully completing a Chapter 11 reorganization, unforeseen external economic factors quickly undermined the company's recovery, forcing a subsequent Chapter 11 filing.

• Example 3: Hospitality Group Struggling Post-Pandemic

  Gourmet Hospitality Group, which owned several upscale restaurants and boutique hotels, filed Chapter 11 in early 2020 due to the severe impact of the COVID-19 pandemic. They reorganized by closing underperforming locations, renegotiating leases, and securing new financing, emerging from bankruptcy in 2021. However, the recovery was slower than anticipated; persistent labor shortages, continued high operating costs, and a slower-than-expected return of business travel and dining to pre-pandemic levels meant the group couldn't generate sufficient revenue to service its restructured debt. By late 2023, they were again facing insolvency and filed for Chapter 11 for the second time, entering a "Chapter 22" scenario.

  How this illustrates the term: The hospitality group completed its initial Chapter 11, but ongoing economic challenges and a failure to achieve sustained profitability led to a rapid return to financial distress and a second Chapter 11 filing.