Three Key Differences Between Chapter 7 and Chapter 11 Business Bankruptcy

Bankruptcy Lawyer Bryan W. Stone answers the question: “What is Chapter 11 Bankruptcy?”


#1 Liquidation vs. “Reorganization”


big-sale-Chapter-7-Chapter-11-Bankruptcy-Attorney-Monroe-Charlotte-Lake-Norman--232x300In a Chapter 7 bankruptcy, a business (partnership, corporation, or sole proprietorship) files a petition in bankruptcy court and liquidates all assets to pay off the creditors. Chapter 7 is also known as a “liquidation bankruptcy.” The trustee oversees the sale of the debtor’s assets, other than certain exempt property which varies by state. Additionally, some of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. For example, if you have a piece of machinery used in your business that has a security interest on it (the machinery is collateral for a loan), then that asset sale will first be used to satisfy the secured party, with any remainder going to your unsecured creditors. You or your business will typically lose a lot of property in a Chapter 7 bankruptcy, but there are other alternatives available to you under the bankruptcy code. An extensive collection of information about bankruptcy can be found at our site here.


In a Chapter 11 bankruptcy, the business (partnership, corporation, or sole proprietorship) files the bankruptcy petition that allows the business to reorganize and pay off its debts. Known as a “reorganization bankruptcy,” this chapter allows a company to continue operating its business and pay creditors going forward.


#2 Winding Up Business or Continue Operating


As mentioned, a Chapter 7 bankruptcy requires the business to wind up its affairs, sell the assets at the direction of the trustee, and then distribute the proceeds under the supervision of the trustee. Depending on the business form (corporation, partnership, or sole proprietorship), some debts may be discharged. A trustee may use their “avoiding powers” to set aside preferential transfers or undo security interests. The trustee creates a “bankruptcy estate” which becomes the legal owner of all the debtor’s property that seeks to maximize the amount from the liquidation and turn it over to the unsecured creditors.


Under Chapter 11, the debtor files a plan with the bankruptcy trustee that lays out business operations, plans to pay back creditors, and any reorganization of the business necessary to achieve these goals. The debtor takes an additional identity known as the “debtor in possession” that takes many of the duties and powers of the trustee such as accounting, distribution of property and proceeds, and filing returns (such as tax or financial statements). The creditors’ committee can also play a major role in structuring the bankruptcy plan and holding the debtor in possession’s management accountable.


#3 Powers of the Bankruptcy Trustee


Under Chapter 7, the trustee will take account of the debtor’s assets, oversee the creditors’ meeting, and ultimately liquidate the business. If the debtor is a business, the trustee may operate the business for a short period of time if it will enhance the bankruptcy estate and will likely increase the liquidation proceeds available to the creditors.


The trustee’s role is slightly different but no less important in a Chapter 11. In a Chapter 11 bankruptcy, the trustee will oversee the reports and accounting by the debtor in possession. The trustee will oversee payments and expenses, ensuring that management is properly operating the business to benefit creditors under the plan of reorganization. The debtor in possession must pay quarterly fees until the reorganization is resolved and final decree entered. Only in rare circumstances (such as gross negligence) will the trustee take over the business management and continue to run it. In most instances the business may continue with its current management and business operations subject to the plan filed with the bankruptcy court.


Choosing the right kind of bankruptcy for you business is paramount. The experienced bankruptcy attorneys of Arnold & Smith, PLLC have the know-how to represent any type of client, whether debtor or creditor, and can advise you further. Contact us today for a consultation of your case. We want to guide you through the bankruptcy process so that you can begin toward a better financial future. If you are contemplating bankruptcy in the Mecklenburg County, Iredell County or Union County area, please call the skilled lawyers at Arnold & Smith, PLLC at 704-370-2828 or find additional resources here.





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