Which Is Better: Chapter 7 or Chapter 11?
Chapter 7 and Chapter 11 are types of bankruptcy cases that are possible for a business to undergo and resemble respectively the choice between Chapter 7 and Chapter 13 bankruptcy for individuals. A business typically chooses to file for bankruptcy when it has debts greater than its ability to pay and cannot meet the demands for payment from creditors and clients. Which form of bankruptcy is better depends on the severity of the debt and plans of the business owners.
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Chapter 7
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A Chapter 7 bankruptcy means the end of the business. During Chapter 7 case, a court appoints a trustee who creates a bankruptcy estate that holds the assets of the company. These assets are then sold and the proceeds are used by the trustee to pay creditors. Employees are terminated and the company stock is cancelled. Shareholders rarely receive any money from a Chapter 7 case because the estate uses all funds the business has to pay off creditors first.
Chapter 11
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Chapter 11 bankruptcy is a restructuring that businesses choose when they want to continue in operation. A trustee also manages the bankruptcy in this filing, but acts as a manager of the debt restructuring rather than manager of a bankruptcy estate. The trustee and business work out arrangements with creditors to have debt payments reduced, interest rates changed and debts partially paid back or forgiven. The business continues to make payments using the profits from its ongoing operations.
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Recovery
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Chapter 11 is a better option for a business interested in recovery and set the stage for a new opportunity, a transition to wiser financial activity and renewed efforts. However, businesses should be careful. Bankruptcy has negative effect on investors and the reorganized business may not be able to find the necessary funding to continue. A Chapter 11 bankruptcy could turn into a Chapter 7 filing.
Complexity
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Chapter 11 bankruptcy is a complex process that requires greater effort from the owners of the business. If the debt problems are severe, business owners may find it is simpler and better to end the business rather than trying to revive it. If lenders appear to be inflexible, the business may incur even greater debt attempting a Chapter 11 bankruptcy and would be better off take the shorter duration of a Chapter 7 case.
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