An Overview of Bankruptcy Types
Bankruptcy is intended to provide relief for a person or business which cannot pay bills. Chapter 7 Liquidation bankruptcy allows the debtor to liquidate (sell) all its assets and divide them between creditors to whom it owes money, according to a debt claim priority. At the end of a Chapter 7 bankruptcy, the business is closed. In Chapter 11 bankruptcy, on the other hand, the business continues to operate under the watchful eye of a court-appointed trustee, who approves major decisions. The business sets up a plan for paying back creditors and recovering from bankruptcy as quickly as possible. Often, a new company emerges from the ashes of the old.
Which Type is Best?
The question of which type is "best" might be better asked which is best for a particular company and situation. Here are some considerations for selecting one type of bankruptcy over the other:
Choose Liquidation If...
- The business is not a public corporation
- There are so few business assets that there is almost no chance that they will be able to pay back the company's debt.
- There are no intangible assets, such as goodwill or intellectual property, that could survive the bankruptcy and provide value in an ongoing business.
- If the owner(s) are unwilling to continue in the business, under a trustee or otherwise.
Choose Reorganization if...
- The business is a public corporation which has the possibility of re-emerging from reorganization.
- The business continues to sell and has the possibility of future revenues to offset costs.
- The business has intangible assets that could survive the bankruptcy and provide value in an ongoing business.
- If the owner(s) are willing to work with the trustee on a plan to restructure, pay off creditors, and emerge stronger.
Before you decide on a bankruptcy type, find a bankruptcy attorney who specializes in business bankruptcies and discuss your specific situation.
