Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a form of reorganization in which the company continues to operate while working to settle its debts. Similar to Chapter 13 personal bankruptcy, Chapter 11 cases involve a debt repayment plan outlining how debt payments will be made to creditors. In a Chapter 11 case, business debts can be repaid in a variety of methods. Creditors may be allowed to stake a claim on future profits, ownership rights may be sold to investors, and creditors may be given market shares that can be cashed in at a later date. Additionally, the company may transfer a portion of its assets to satisfy debt payments to creditors. The overall advantage of Chapter 11 is that it allows the company to remain operational and regain control of its profitability.
Chapter 7 Business Bankruptcy
Similar to Chapter 7 bankruptcy for individuals, Chapter 7 bankruptcy for businesses is a form of liquidation bankruptcy. In this scenario, business assets are liquidated and the proceeds are distributed to creditors to satisfy debts. Additionally, the profits from the sale of any remaining market shares will be distributed to creditors. The company ceases operations, resulting in the termination of all ownership rights. Only after all creditors have been paid can the company's owner claim any residual assets or profits from the company's liquidation. Business Chapter 7 cases are typically only pursued if the company cannot regain profitability in the foreseeable future.
Case Outcomes
Like personal bankruptcy, there are two possible outcomes for both categories of business bankruptcy. The desired result is a debt discharge, whereby the debts are resolved and the case is concluded. In a Chapter 11 case, a discharge signifies that the debts have been resolved and the business has returned to profitability. In a Chapter 7 bankruptcy for a business, a discharge signifies that the company has paid its remaining debts and is no longer in operation or liable for its debts.
The alternative is a debt dismissal, in which the case is terminated by the debtor or the court without any debt resolution. The debtor may request dismissal of the case if they believe debts can be resolved outside of bankruptcy or conversion to Chapter 7 if they lose faith in their future profitability. The court may dismiss the case if the petitioner fails to comply with the process's rules and regulations, or it may convert the case if it believes that doing so is in the best interest of the creditors.
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