There are many misconceptions in the bankruptcy world and the line only gets further blurred when we start talking about a business bankruptcy. While there are key differences in personal bankruptcy versus a business bankruptcy, one thing is clear: many people have very little understanding of how the process actually works. While you may have seen a business advertising a “going out of business” sale, this doesn’t necessarily mean that they filed for bankruptcy. The same is true for the opposite; just because a business files for bankruptcy does not mean they will inevitably be “going out of business”.
Business Bankruptcy Basics
There are two types of business bankruptcy: business Chapter 7 and Chapter 11 bankruptcy. Some of the more well known or big corporation bankruptcies that flood the news from time to time usually refer to a Chapter 11 case. In Chapter 11, a business seeks to reorganize its debts and remain in operation. Typically, this is achieved by selling off a portion of assets, selling the company to new ownership or cutting services and costs. It is rare for a company to file for Chapter 11 and end up “going out of business”. The main idea behind the filing is to remain in operation while reorganizing debts and returning to profitability.
Like personal bankruptcy a business Chapter 7 refers to a debt elimination bankruptcy, in which debts are eliminated rather than repaid. A company that files for business Chapter 7 is usually suffering from more severe financial troubles that are not able to be resolved through a less invasive bankruptcy. In most business Chapter 7 cases, the company will cease operations and sell off any remaining assets to satisfy debts to creditors. These are the cases in which people refer to as “going out of business”. However, it is important to note that some business may go out of business before any financial pressure arises and are able to avoid the need for bankruptcy.