When a financial situation becomes untenable, Companies struggling under the weight of massive debt may explore bankruptcy. Would-be California filers may discover there are different categories of business bankruptcy. Chapter 7 and Chapter 11 reflect the two bankruptcy categories that offer distinct approaches to dealing with insolvency.
Chapter 7 vs. Chapter 11
Stark differences exist between Chapter 7 and Chapter 11. With Chapter 7, a company undergoes liquidation bankruptcy, while a Chapter 11 filer develops a payment plan to address debts. Both Chapter 7 and Chapter 11 involve discharging certain obligations, although Chapter 7 filers might find more unsecured debt discharged. A Chapter 7 filer would probably be in a more difficult financial situation and unable to follow through with a payment plan.
Chapter 7 business bankruptcy follows similar approaches to Chapter 7 personal bankruptcy. Namely, a trustee will liquidate assets to cover debts. For example, when a company owns unexempt real estate or holds bonds, these assets might be ordered liquidated to pay creditors, with the remaining debts discharged.
Chapter 11 involves restructuring debts, with some amounts negotiated lower or outright discharged. The company doesn’t fold and continues operating to generate the funds necessary to make the payments.
Exploring bankruptcy options
It might be erroneous to think of one chapter of bankruptcy better than the other. Instead, potential filers must look at their particular situation and determine which approach is most appropriate. Also, there are eligibility requirements.
If a company cannot generate revenue, it wouldn’t be able to cover payments. Some businesses find closing down is the only option when losing money each year. Others could be in a position where restructuring may lead to making necessary changes required for future success.