I own a business that I think needs to file bankruptcy. What is the difference between a Chapter 7 and a Chapter 11?
Businesses that are corporations, partnerships or limited liability companies may file Chapter 7 or 11 in bankruptcy. Chapter 7 is a liquidation bankruptcy. It means the business is closing, and all of the assets will be liquidated to pay creditors. Secured creditors and tax authorities get paid before unsecured creditors. Corporations may not protect, or exempt property—all assets will be liquidated. An individual person who has guaranteed payment of debt, such as a bank loan or a lease, will not receive relief from the liability of the debt unless the liquidation of the assets satisfies those debts in full. This is a common situation with small businesses. Individuals may end up filing bankruptcy to manage the business debts for which they may be liable. Chapter 11 is a reorganization bankruptcy. It means the business is attempting to stay open and actively operating, but it is reorganizing debt in some way. Generally, in a Chapter 11 the old management stays in control of the business subject to certain rules and restrictions. The business will be given time to propose a plan of reorganization which may or may not pay all creditors in full. The creditors get to vote on the plan of reorganization. The plan can be approved either by the vote and consent of the creditors or in certain circumstances it may be approved by the Bankruptcy Court over the objection of the creditors. The approved plan of reorganization will be a contract between the business and its creditors which will replace all the old contracts which the business used to have with its creditors. Bankruptcy can be a useful tool in helping your business to survive in a difficult economy. Please call my office for an appointment to discuss your options.