Mark Pestronk
Mark Pestronk

Q: Recently a fairly large tour operator filed for Chapter 11 bankruptcy. It owes refunds to hundreds of consumers whose trips were canceled. The odd thing is that the operator is still selling tours and planning to operate them. How is that legal? I predict that after the operator collects consumers' money, it will cancel those tours, too. Isn't there a government agency that can shut them down? Is there a way for consumers to get refunds if they do shut down?

A: In Chapter 11, it is perfectly legal for a company to stay in business. Many companies emerge from Chapter 11 stronger than before, including all the major U.S. airlines.

The term "Chapter 11" refers to Chapter 11 of the U.S. Bankruptcy Code. That chapter allows a company to keep past creditors at bay while it conducts new business.

While the company is in bankruptcy, it must propose a "plan of reorganization" for past creditors. The term "reorganization" does not mean that the management or structure gets reorganized; it simply means payment of past creditors over time, either in full or, more typically, just in part.
Companies in Chapter 11 are not expected to pay off all past creditors in full, and few companies do. Rather, they propose to pay what they can afford and no more.

If the bankruptcy court approves the plan, then the company exits bankruptcy and follows the payment requirements in its plan. So the tour operator could stay in business while giving full, partial or even no refunds to consumers whose trips were canceled.

I realize that it sounds unfair for a tour operator not to use all its money to pay those consumers, but bankruptcy law is not fair. It favors businesses at the expense of consumers.

In its plan of reorganization, the company must give priority to consumer deposits up to $2,850 per person, but that does not necessarily mean that consumers will get that much of a refund. After higher-priority creditors, such as attorneys and employees, are paid, there may not be much left over for consumers.

No government agency is empowered to shut down any tour operator, even if, as you assert, it constitutes a continuing risk to consumers. If the operator issues airline tickets under an ARC appointment, ARC will let it retain its appointment as long as it continues to pay its weekly sales report after the bankruptcy filing.

If the operator is based in California and is registered under the seller of travel law there, consumers in California may be able to get a refund from the Travel Consumer Restitution Corp. No other state has a similar fund.

The only sure way to get a full refund from tour operators that file for Chapter 11 is to have paid by credit card. A consumer can simply dispute the charge and provide details, and the card issuer will reverse the charge. Debit card issuers usually do the same as a matter of policy.

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