Understanding Bankruptcy: The Differences Between Reorganization And Liquidation
Bankruptcy is a scary prospect for most businesses. But the truth is, bankruptcy is just another tool you or your company can utilize on your road to success. Understanding the bankruptcy options available to you and what they would mean for your business is essential to removing the fear and recognizing the practicality. While the following is meant to be informational, keep in mind that Maxwell Dunn can help you decide which bankruptcy options or alternatives could be right for your company so give us a call to discuss your specific situation. We are a local Southfield bankruptcy attorney that beleives in helping our clients use bankrupcty as a chance to get back on track. We never want you to feel hopeless during the process and we are dedicated to helping you use this time to find the right solution for your specific company’s needs.
Bankruptcy for businesses can generally be understood as having two possible branches: Reorganization and Liquidation. Below we’ll explain the differences between the two.
Reorganization refers to the form of bankruptcy that falls under Chapter 11 and Chapter 13 of the US Bankruptcy Code. Chapter 11 is the specific reorganizational bankruptcy code that can be used by businesses. While individuals can also utilize Chapter 11 bankruptcy, Chapter 13 is reserved solely for the use of individuals and cannot be utilized by business entities.
As with all bankruptcy, the tactic of reorganization is used as a protection when debts exceed assets and cannot be paid back. Therefore, insolvent companies may wish to file for Chapter 11 bankruptcy. The big advantage to reorganization is that the business owner will generally retain possession of his or her business in its current form. They will continue to operate the business as a “debtor in possession.” Furthermore, an “automatic stay” will be placed on all litigation against the company causing it to pause until it is resolved in bankruptcy court or continued after the company emerges from bankruptcy.
The company will work with a bankruptcy court and its creditors to make a plan for reorganizing its finances and paying back its debts. From a creditor’s perspective, this is advantageous because, in theory, allowing a business to continue under a reorganization plan rather than liquidate will allow the company to pay back more of its debts.
There are numerous intricacies to the possible plans a business can set forth under Chapter 11 bankruptcy, but once the plan is approved by the courts and implemented the company will emerge from the bankruptcy free of most of the financial obligations that caused it to go under. Reorganization through Chapter 11 bankruptcy generally takes a few months to a few years.
Liquidation is the form of bankruptcy that occurs under Chapter 7 of the US Bankruptcy Code. Liquidation can either be a chosen form of bankruptcy by the debtor or forced upon a company by its creditors.
In a liquidation, all assets of a company are sold off by an appointed trustee and used to pay as much of the debt as possible back to the creditors. Following the distribution of assets to creditors, the company is permanently dissolved and if there is stock, it loses all value.
Generally, this dissolution of the company means all employees will lose their jobs, but it is possible for large companies to sell entire divisions to other companies such that the employees will not be out of work.
In Chapter 7 bankruptcy, the liquidation process usually takes several months and creditors often do not recoup very much of the debt owed.
If your business is having financial trouble, bankruptcy could be a viable option to pursue. Call Maxwell Dunn to discuss whether reorganization or liquidation could be right for your company.