Chapter 7 bankruptcy is typically associated with individuals who file for personal bankruptcy. In some cases, however, companies choose to file for Chapter 7 rather than the more common Chapter 11. Let’s look at when a company might want to consider going the Chapter 7 route.
Chapter 7, whether it’s filed by an individual or company, is considered “liquidation” bankruptcy. When owners determine that a company’s debt is so large that it can’t be reorganized, they may choose Chapter 7. This allows them, under the supervision of a trustee, to pay their creditors (to the extent possible) by selling their nonexempt assets. Corporations as well as small businesses may be able to file for Chapter 7.
Sometimes, a business will file for Chapter 7 after it has tried Chapter 11 but not been successful. Therefore, it’s important to talk briefly about Chapter 11. This is referred to as “rehabilitation” bankruptcy because it lets a company reorganize its debt so that it can continue operating but be in a better financial situation than it was. This reorganization typically involves renegotiating terms of loans with creditors, selling off some nonperforming assets and cutting the workforce.
Companies may choose to pursue Chapter 11 to be in a better position to file Chapter 7. As noted, a company’s owners may hope they can save the company through Chapter 11 but find that they simply can’t. They may then choose to file for Chapter 7.
If your business is struggling with debt, it’s wise to know what your options are. An experienced bankruptcy attorney can help you determine what strategy is best for your circumstances and your goals.