Business Chapter 7 Bankruptcy
A business Chapter 7 bankruptcy is comparable to a personal Chapter 7 bankruptcy. The goal of Chapter 7 bankruptcy for businesses is total debt elimination. Typically, businesses seeking total debt elimination are deeply indebted and do not anticipate a financial solution to return to profitability. Instead, they intend to cease operations and settle outstanding debts with creditors.
Chapter 7 bankruptcy is not ideal for a business, as it is anticipated that the company will no longer be able to operate. When a business ceases operations, any remaining assets are liquidated to settle debts owed to creditors. Debts of a business include any remaining company funds, equipment, stocks or shares, and any residual inventory. These items are sold, and the proceeds are distributed among creditors.
Small enterprises or sole proprietorships may find Chapter 7 to be relatively straightforward. During the bankruptcy process, the owner(s) of such businesses can simply relinquish their rights and stake in the company. Business Chapter 7 cases become more complex for large companies or those with multiple proprietors, as the process of halting operations can be lengthy.
Chapter 11 Bankruptcy
A Chapter 11 bankruptcy is similar to a Chapter 13 bankruptcy in that the primary objective is to develop a debt repayment plan while retaining assets. Businesses that file for Chapter 11 intend to reorganize their finances and settle a portion of their debts with creditors. The objective is to restructure the company in order to relieve financial pressure and restore profitability. Rarely do businesses cease operations during a Chapter 11 proceeding.
The majority of businesses will file for Chapter 11 whenever feasible. Ultimately, no business would choose to cease operations unless it were absolutely necessary. A company that files for Chapter 11 bankruptcy has a greater chance of retaining its assets throughout the process. In most cases, the debt restructuring plan will include concessions that give creditors first dibs on future profits or increase their equity stake. In Chapter 11 cases, assets are rarely liquidated unless a third party acquires ownership during the process.
Chapter 11 filings are prevalent among large corporations, businesses, and franchises. Numerous sports teams have resolved their debts through Chapter 11 by selling their ownership to a third party in exchange for debt relief. A Chapter 11 proceeding is better suited to manage the debts and assets of large corporations with multiple proprietors and shareholders.
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