If your business is in financial distress, a business bankruptcy could be a helpful tool to manage debt and reorganize operations. There are two common options for businesses: Chapter 7 and Chapter 11. Each chapter serves a distinct purpose and comes with its own set of rules and outcomes. This article will address the key differences between Chapter 7 and Chapter 11, helping businesses understand which option may be more suitable for their financial situation. For a more basic discussion of what is bankruptcy, you can find our article and discussion HERE.
Chapter 7 Business Bankruptcy: Liquidation
A Chapter 7 is commonly referred to as a “liquidation” business bankruptcy, and it is often used when a business is at the point of no return financially. Chapter 7 is appropriate for businesses who are ready to turn over their keys and all their assets and leave. Here are some of the key characteristics of Chapter 7:
- Liquidation of Assets: Under Chapter 7, a business’s assets are sold off, and the proceeds are used to pay off its creditors. This process results in the complete closure of the business.
- Quick Resolution: A Chapter 7 business bankruptcy is a relatively fast process, taking typically six to eight months to conclude.
- Personal Liability: Business owners can be held personally liable for any unpaid debt balances that they personally guaranteed, after the business assets have been liquidated.
- No Debt Restructuring: Chapter 7 does not involve debt restructuring or a plan for continued business operations. This bankruptcy option is best when the business is no longer viable but still has assets to liquidate.
Chapter 11 Business Bankruptcy: Reorganization
A Chapter 11 is referred to as a “reorganization” business bankruptcy. When a business believes it can continue operations by addressing their debt problems, a Chapter 11 business bankruptcy can help the business recover from financial distress. Here are some of the key characteristics of Chapter 11:
- Business Continuity: A Chapter 11 allows the business to continue its operations while developing a plan for debt repayment and financial restructuring.
- Debt Restructuring: In a Chapter 11, the business can negotiate with creditors to reduce debts, extend payment terms, and reorganize its financial structure.
- Repayment Plan: The business creates a repayment plan, which must be approved by creditors and the court, outlining how it will meet its financial obligations over time.
- Extended Timeline: Chapter 11 bankruptcy proceedings can take several years to complete, allowing for a more extended period of debt adjustment and recovery. A typical Chapter 11 repayment plan is sixty (60) months, or five (5) years.
- Operation Retained: The existing operation of the business typically remains in place during the Chapter 11 process.
Choosing Between Chapter 7 and Chapter 11
The decision to file for Chapter 7 or Chapter 11 bankruptcy should be based on a careful evaluation of your business’s financial situation and prospects. Additionally, you need to decide if you are prepared to keep fighting for your business or if you have already given it your all. Other things to consider include:
- Financial Viability: If you believe your business can recover and continue operations, Chapter 11 may be the better choice. You will need to have an expected continuing income stream and a potential to increase operations. If there is little to no hope for recovery and/or continued income, a Chapter 7 may be more appropriate.
- Asset Preservation: If your business has assets, do you need to retain those assets? A Chapter 11 allows the business to retain its assets, which can be essential for continuing operations. In a Chapter 7, you would need to surrender all assets of the business, including bank accounts, accounts receivable, and vehicles.
- Speed of Resolution: In a Chapter 7, you are able to select the date of filing, the day before will be the last day you operate. Timing may be important in selecting when to file. A Chapter 7 bankruptcy is much faster but results in the closure of the business. In a Chapter 11 case, there is significant paperwork that needs to be addressed before filing. While a Chapter 11 bankruptcy provides more time for your business to recovery, it will be complex and costly.
- Personal Liability: If you personally guaranteed any debt for the business, a business bankruptcy only removes the business’s liability for those debts. Business owners who personally guaranteed debts will still have personal liability in either bankruptcy filing. This may mean you will need to consider whether you will need to file a personal bankruptcy as well.
- Legal Guidance: It is very important to consult with a bankruptcy attorney who handles business bankruptcy cases to discuss and decide the best course of action, taking into consideration financial viability of the business, personal guarantees, and cost. A business cannot file a Chapter 11 case without an attorney. A business should also consider if it can afford the legal fees for a business bankruptcy. See where our fees start HERE.
- Landlord/Tenant Issues: If your business is a commercial tenant that leases space, review our article about what business tenants should know HERE.
Chapter 7 and Chapter 11 bankruptcies serve very different goals and outcomes in the world of business insolvency. For explanations from the Middle District of Florida for the differences in a Chapter 7 and a Chapter 11, click HERE. A Chapter 7 is for closing up shop and walking away, which would result in the liquidation of assets and the closure of your business. A Chapter 11 offers a chance for a business to tighten its belt, reorganize its debts, and continue operations. Making the right choice between these two options is crucial for the future of your business. Consulting with a bankruptcy attorney is a smart point to assist you in navigating the complexities of bankruptcy proceedings effectively.
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