When a company is failing and its business operations can no longer satisfy its debts and obligations it will often seek Bankruptcy protection in order to handle its outstanding liabilities. Bankruptcies allow companies to restructure or satisfy debts under the protection and oversight of a Bankruptcy court. While there are several different types of Bankruptcy filings, we’ve outlined below some of the most common paths that troubled businesses choose.
Chapter 7: Liquidation
In a Chapter 7 Bankruptcy, the court will appoint a Trustee to oversee the liquidation of all the business’s assets. Once all of the assets have been liquidated, creditors may file a claim and receive a share of the liquidation proceeds. Chapter 7 is typically used when a business has no viable path forward and culminates in the business entity being dissolved.
Chapter 11: Reorganization
Chapter 11 Bankruptcy is best suited for companies who do have a viable path forward after implementing a Plan of Reorganization. In Chapter 11 Bankruptcy, a court-appointed Trustee will oversee and implement a Plan of Reorganization that stipulates how creditors and debts will be handled. After the reorganization, the entity will continue in business.
Check out our post on “Plan of Reorganization for Chapter 11 Bankruptcy” for more information.
Bankruptcy Alternative: Assignment for the Benefit of Creditors
An Assignment for the Benefit of Creditors (ABC) is not a form of bankruptcy, but rather a state-law alternative to bankruptcy that can offer several benefits to companies looking to liquidate assets in a more cost effective manner in order to satisfy debts. The ABC process involves appointing an Assignee who is tasked with liquidating a company’s assets and dispersing the proceeds to creditors. The ABC process is generally completed more quickly, with more control, less expensively, and with more discretion than a traditional Bankruptcy proceeding.
See our earlier post on “3 Benefits of ABCs” for more information.