When many people hear that a business is declaring bankruptcy, they assume that that is the end of the business. It is going under, and it is going to cease operations. They imagine that the business will sell off its inventory and assets, such as equipment and real estate.
This is true in some situations, such as with a Chapter 7 bankruptcy filing. Liquidating nonexempt assets is necessary to pay off creditors. But this liquidation often means that the business is going to have to close. Chapter 7 was likely selected because it simply wasn’t generating enough income to be viable, so assets are the only thing of value the business can offer.
That said, Chapter 11 bankruptcy works a bit differently, and it can allow the company to keep operating.
Proposing a reorganization plan
Under Chapter 11, a plan is proposed to reorganize the business’s debts. Repayment plans are set up, and that debt can be spread out over a number of years. The business then makes monthly payments to slowly pay the debt down over time.
This is better for the business, in many cases, because it gets to stay open and continue generating income. But it can also be better for creditors, who eventually may receive far more of the money that they were owed than if the business had just liquidated assets and paid off a portion of that outstanding debt.
It is important for business owners to know the differences between Chapter 7 and Chapter 11 bankruptcy and all of the options that they have if their company runs into financial trouble.