For companies in dire financial situations, bankruptcy can be a viable option to either liquidate or reorganize the business’s structure and debts to either work towards a realistic closure or remain operational. In the following post, we outline some of the key differences between the two most common business bankruptcy filings: Chapter 7 and Chapter 11.
‘Liquidation’ vs. ‘Reorganization’
Chapter 7 is known as a “liquidation” bankruptcy because businesses that go through this filing have their assets sold by the trustee in order to generate funds to be used to pay creditors. The court will appoint a trustee to administer the property, sales, and disbursements of funds, as well as to investigate the affairs of the business.
In Chapter 11, the goal is to reorganize the business through an intricate process that allows the business to restructure its debt. During the proceeding, debtors who want to remain in business take every available option to stabilize the company in a court-approved plan that would ideally put the entity on a path to solvency. A business in Chapter 11 operates for the benefit of its creditors, rather than the benefit of its owners.
Subchapter V of Chapter 11 was added in 2020 to make bankruptcy easier for qualifying small businesses. This subchapter streamlines certain deadlines and offers more flexibility in building restructuring plans. A trustee generally assists in the administration of the case with an eye towards encouraging the confirmation of a consensual plan. The CARES Act in 2020 raised the subchapter V debt limit to $7.5 million.
If a company files for Chapter 11 and can’t successfully reorganize, the court will most likely transition the filing to a Chapter 7 bankruptcy and liquidate the company’s assets. It’s also worth noting that both of these options are open to individuals, but individual filers can also look at Chapter 13 as an option.
Arkansas businesses know that they have a professional and trusted source in Natural State Law to help them navigate the complex bankruptcy process. For more information and to schedule a free review of your situation, call (501) 916-2878 today.