Business Chapter 7 Bankruptcy
Bankruptcy Chapters Typically Utilized by Businesses
Business Chapter 7 compared to Chapters 11 and 13
In the simplest terms, Chapter 7 is a liquidation of business or individual assets, Chapter 11 is utilized as an alternative to liquidation by reorganization of your business debts and assets, and Chapter 13 is utilized solely by individuals with regular income to achieve mortgage/auto loan modifications or otherwise unavailable discharges of debt.
Once a Debtor has filed a Chapter 7 bankruptcy petition by an individual or a business, a trustee is appointed from a panel of Trustees to liquidate the debtor’s assets, determine if the debtor’s claimed exemptions (available only to individuals) are appropriate, determine claim amounts, and then make distributions to creditors in accordance with the priority scheme. Upon the filing of the Chapter 7 bankruptcy petition, the automatic stay (a federal court injunction) acts as a stay of collection activity other than through the Bankruptcy Court. Most individual assets are exempt and may be kept. Once assets are liquidated, the trustee pays off as much of the unsecured debt as possible and the rest is discharged. Chapter 7 is commonly used by individuals to discharge substantial debt and afford them the opportunity to begin anew, with a clean financial slate and a fresh start. Chapter 7 bankruptcy cannot be utilized by individuals to modify or discharge debt secured by a home or auto. Business undergo the same process, but there are no exemptions or discharge.
Historically, only Chapter 7 liquidation was available to business debtors. However, Congress enacted Chapter 11 to allow businesses an alternative to liquidation where a reorganization will result in a greater recovery by creditors than in a liquidation. Chapter 11 typically results in either a liquidation of unneeded assets or the confirmation (approval) of a Chapter 11 Plan. The Plan acts as a Court-approved workout contract with all of the business’s creditors. Chapter 11 can be utilized to solve a myriad of business problems including:
In a Chapter 11, unlike the Chapter 7 process, the debtor (or its management) acts as its own trustee to formulate a liquidation or reorganization plan (either through a sale of assets or restructuring of liabilities and equity). In a Chapter 11 case, the Debtor’s plan of reorganization governs how distributions are made rather than the strict liquidation priority scheme present in Chapter 7 liquidation.
Chapter 13 distinguished
A Chapter 13 Bankruptcy is sometimes described as a Chapter 11 for individuals with regular income. The requirements for filing Chapter 13 include having a steady income, less than $269,250 in unsecured debt and less than $807,750 in secured debt. The debtor and trustee devise a repayment plan and submit the plan to bankruptcy court for approval. Once approved, the debtor must repay all or a portion of their creditors in accordance with the plan, usually a percentage of what is owed over a three- to five-year period. Debtors filing Chapter 13 do not have to liquidate their assets as part of the repayment plan. Once the plan has been fulfilled, all other debts are discharged. Businesses may not file Chapter 13 Bankruptcy
Business Use of Chapter 7 Bankruptcy
Because a business does not obtain a discharge of debts in a Chapter 7, Chapter 7 bankruptcy is utilized infrequently by business debtors. However, there are circumstances where it is utilized such as (a) when management knows a liquidation is necessary, but wish the Chapter 7 trustee to perform that function; and (b) when money is being expended in a lawsuit against an insolvent business with no prospect of recovery (either by the plaintiff when the business does not realize that liquidation is the best option for all (e.g., Involuntary Bankruptcy) or by the defendant when the purported creditor is merely being litigious and there is no necessity to argue liability when there is no money to pay it under any outcome – saving litigation costs).
If an outcome other than the straight liquidation, a Chapter 11 Bankruptcy is the usual tool of choice.