Business Bankruptcy – Reorganization vs Liquidation
Business Bankruptcy can refer to two situations. The first is a Chapter 11 Bankruptcy (reorganization). Chapter 11 Bankruptcy is used when a business wants to keep operating and stay in business, but needs some temporary relief from creditors. The other situation is Chapter 7 Bankruptcy for a business (liquidation). A business files Chapter 7 when it no longer wants to keep operating because there is no hope to salvage the business. Any assets of the business are liquidated for the benefit of creditors, and the business is shut down.
Chapter 11 Bankruptcy – Time to Restructure
When a business files a Chapter 11 Bankruptcy, the business usually becomes what is called a “debtor in possession” and can keep managing and operating the business, but under the judicial oversight of the court. As “debtor in possession,” the debtor can now restructure its business. During the restructuring, the court may permit the debtor to cancel certain executory contracts, and to acquire new favorable loans by giving new lenders priority on business profits.
Just like in other Chapters of bankruptcy, filing a Chapter 11 comes with the Automatic Stay of Section 362 of the Bankruptcy Code. This means that creditors may not take any collection efforts against the company after the case is filed (lawsuits, etc).
Chapter 11 Plan
In most Chapter 11 cases, the debtor has 120 days after filing the petition to propose reorganization plan. Creditors may also propose their own plans after that time period has run. A final Chapter 11 plan must be approved by the creditors and confirmed by the bankruptcy court. The plan lays out how the business will operate and how the business will treat different creditors during the plan. After the business completes the Chapter 11 plan, (which can last from a few months to a few years), the business will emerge from the plan.
Chapter 7 for a Business – Business Liquidation
When a business is so badly burdened with debt that it can no longer service the debts as they become due, it may need to file Chapter 7 “Liquidation” Bankruptcy. When a business files Chapter 7 Bankruptcy, the business operations will usually cease. All the assets of the corporation will be liquidated (sold off) by the Chapter 7 Trustee. The proceeds will then be distributed to creditors based on a system of priority. However, any creditors that were secured by liens on certain assets will have first priority on the proceeds of the sale of that secured asset during the liquidation.
No Discharge in a Business Bankruptcy
Only individuals filing Chapter 7 receive a discharge order. Unlike businesses, individuals “survive” the bankruptcy and need a way in the future to prove that pre-petition debts are uncollectible (discharged). But businesses do not receive a discharge because it is not necessary. After a business goes through Chapter 7, it is no longer in existence (it is dissolved) and it is understood that there is no way for creditors to continue to collect on the debts.