When a company files for bankruptcy, what happens next depends on which chapter of the Bankruptcy Code they choose—most often Chapter 7 or Chapter 11.
Chapter 7: Shutting Down
Chapter 7 is typically used when a business is closing its doors for good. In this type of bankruptcy, the court appoints a Trustee to take control of the company’s assets. The Trustee will sell anything of value—such as equipment, inventory, customer lists, furniture, vehicles, tools, or licenses—to help repay the company’s creditors.
Once the assets are sold, creditors file claims with the Bankruptcy Court. They are then paid from the proceeds of those sales. Sometimes creditors receive full repayment, but more often, they get a partial amount based on the available funds and total claims.
Chapter 11: Restructuring and Moving Forward
Chapter 11 is designed for businesses that want to stay open while reorganizing their debts. This process gives the company time to get back on track financially, often by renegotiating contracts, selling off select assets, or streamlining operations.
Under Chapter 11, the business must submit detailed monthly financial reports to the court and work closely with its attorney to develop a Chapter 11 Plan. This plan outlines how much each creditor will be paid, in what order, and over what timeline.
While more complex and time-consuming, Chapter 11 gives businesses a chance to recover and continue operating—something Chapter 7 does not allow.
If you have any questions about the topic discussed in this article, or any bankruptcy law matter, please give us a call at Bononi & Company 724-832-2499. We can help determine the best course of action for your business.