Chapter 7 vs Chapter 11 Bankruptcy

Both chapter 7 and chapter 11 bankruptcy are designed to provide some type of protection for businesses that have debt problems. However, these two types of bankruptcies are very different and have different benefits to the companies that use them. Here are the basics of chapter 7 and chapter 11 bankruptcy and how they compare to one other. 

Chapter 7

Chapter 7 bankruptcy is referred to as the "liquidation bankruptcy." This means that when a company engages in this type of bankruptcy, they are going to be able to completely liquidate all of their debts. This gives them a clean slate and eliminates all of their debt. With this type of bankruptcy, a trustee is going to oversee the process. They are going to have the right to claim any of the assets of the company. They will take these assets and sell them in order to repay the creditors of the company. In the vast majority of cases, this type of bankruptcy results in the company going out of business.

Chapter 11

Chapter 11 bankruptcy does not always result in the closing of the company. Companies that are in bad financial shape can utilize this form of bankruptcy in order to get back on their feet. With this type of bankruptcy, they are going to utilize a reorganization plan. This means that your business is going to reorganize their debt and start repaying their creditors. 

With Chapter 11 bankruptcy, the company is going to have to go through a very complex process. In fact, it is the most complex of all bankruptcies. Because of this complexity, the company is going to have to pay quite a bit of money in legal fees to complete the process. 

With this type of bankruptcy, the company is going to have to work with each creditor individually. They are going to have to talk to each creditor individually and determine if they can adjust the terms of their debt. For example, they might talk to one of their creditors and ask them if they can lower the interest rate or extend the length of the loan term. 

In some cases, the company will also offer a portion of the equity in the company to their creditors. Creditors can use the amount of money that they are owed in order to take a part of ownership in the company.

Impact

The impact of both of these bankruptcies can be negative for a company. When customers here that the company is filing bankruptcy, it tends to bring a negative connotation to the company. However, chapter 7 bankruptcy is considered to be a lot more devastating to a companies in Chapter 11. With chapter 7, the company is essentially getting rid of the debts that they owe and liquidating any assets that they have left in order to satisfy the creditors. With chapter 11, the hope is that they will be able to get back on track and continue doing business.

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