It is a sad day for owners and shareholders when a business faces the decision to file for bankruptcy. Unfortunately, many businesses around the country have experienced financial pressures in the wake of a turbulent economy that have resulted in that very decision.
A businesses bankruptcy isn’t much different from a personal bankruptcy, with the exception of differences in how the debts are resolved and assets are managed. So, how is a business bankruptcy different from personal bankruptcy?
Chapter 7 Bankruptcy
In both personal and business bankruptcy, the debtor or company has the option to file for debt elimination. In a business bankruptcy this means that the company is no longer profitable and operations will cease. A business Chapter 7 liquidates all remaining assets in order to satisfy debts to creditors. All employees are terminated and anyone with ownership rights or stock shares loses all stake in the company. However, employees and shareholders maintain the right to file a claim to some assets during the bankruptcy process. This is most commonly seen in smaller businesses that “go out of business” rather than be bought out by another company.
Chapter 11 and 13 Bankruptcy
When a business wishes to remain in operation and reorganize their debts. A Chapter 11 bankruptcy is a debt reorganization option for businesses with large amounts of debts; whereas, a business Chapter 13 is reserved for smaller, sole proprietorship businesses. In both Chapter 11 and business Chapter 13 a repayment plan is developed that outlines how creditors will be repaid. Creditors are allowed to vote about whether the plan is acceptable or not in a Chapter 11 bankruptcy. In a business Chapter 13, creditors must follow the plan as outlined without any say. In other words, debts are negotiated in a Chapter 11 bankruptcy versus settled in a business Chapter 13.