When a business is sinking in debt, the owners’ thoughts likely will turn to bankruptcy eventually. This is not a decision to take lightly, but bankruptcy is the best option in many cases. The business may be able to emerge on the other end stronger and better able to compete in the marketplace, without struggling with mounting debt.
There are two types of bankruptcy for businesses: Chapter 7 and Chapter 11. In this blog post, we will briefly explain the similarities and differences between the two, and why a particular business might choose one over the other.
Chapter 7 involves the liquidation of the business. In other words, to pay off as much of the debts as possible, nonexempt property from the business is sold, with the proceeds going to the creditors. One advantage of filing for Chapter 7 is that it triggers an automatic stay, which is a legal injunction that stops creditors from taking actions like repossession, garnishment and foreclosure. This can be a big relief for owners, especially those with personal liability for the business’ debts.
However, ending the business is not always an attractive option. Chapter 11 can be thought of as reorganization bankruptcy. It gives the business the chance to keep operating during the bankruptcy process and restructure itself, while also obtaining debt relief.
Shulman, Hodges & Bastian LLP started out as a bankruptcy boutique firm, and nearly all our attorneys in the bankruptcy group began their legal careers in a bankruptcy judge’s chambers, so our attorneys know Chapter 7 and Chapter 11 inside and out.