Bankruptcy Basics: Reorganization versus Liquidation

If you are not familiar with the topic, business bankruptcy can be a very confusing process. That’s why it can be helpful to bring it back to the basics. Here we will discuss the business bankruptcy basics concerning liquidation and reorganization when filing for bankruptcy.

Reorganization and Chapter 11

Filing for business bankruptcy under Chapter 11 involves reorganization of the company. This means the debtor usually retains control of the business operations after filing for bankruptcy. While the debtor retains control, the business is then subject to oversight by the court. This means the court can appoint someone to watch over the business operations and reorganize the structure so as to improve the financial situation and avoid future problems. Filing for bankruptcy through Chapter 11 reorganization gives the debtor a number of benefits. The debtor can sometimes cancel contracts, obtain special financing, and receive protection against certain litigation.

Liquidation and Chapter 7

Filing for bankruptcy under Chapter 7 will result in quite a different situation. Under business Chapter 7, the debtor’s business will cease operations and a trustee will sell assets to reimburse creditors and discharge the debt. The impact on jobs, and the status of the business as a whole, can greatly vary depending on the case. Large corporations filing for bankruptcy under Chapter 7 will oftentimes lose entire divisions and branches. Despite the sweeping changes liquidation can bring, it does not necessarily mean everyone will lose their job, or that the company will cease to exist. Individuals can also file for Chapter 7 for personal debts.

Reorganization and liquidation are some of the bankruptcy basics, and it is important to understand the differences when walking through the bankruptcy process. Those working in the higher levels of business should familiarize themselves with bankruptcy basics, so as to be better informed on future decisions.