Bankruptcy

What Are the Differences Between Business Bankruptcy Liquidation and Reorganization?

By Cara O'Neill, Attorney
Struggling businesses have two bankruptcy options when seeking relief: liquidation or debt reorganization.

If it’s inevitable that the business will close, you’ll likely file a liquidation bankruptcy. By contrast, if a business can continue operating after restructuring its debt payment, the company would probably benefit from a reorganization bankruptcy.

Business liquidation. It’s important to unwind a failing business with no hope of recovery in a transparent manner. Why? Because it reduces the chance that a creditor will accuse the owner of pillaging company assets before shutting it down—allegations that can translate into costly litigation. In a Chapter 7 bankruptcy, the bankruptcy trustee—the court-appointed official responsible for overseeing the case—sells the company’s assets and distributes the sales proceeds to the creditors in an orderly fashion. Another valuable benefit? Filing for Chapter 7 bankruptcy takes the burden of closing the business off of the owner’s shoulders.

Business reorganization. Many business owners hope that filing for bankruptcy will help the company remain open, and in time, thrive. A Chapter 11 bankruptcy (and in some cases, a Chapter 12 or Chapter 13 bankruptcy) can help an existing business do that very thing. Also known as “reorganization,” this bankruptcy type allows a company to renegotiate its debt contracts with creditors and come up with a manageable repayment plan.

Go to the main business bankruptcy FAQ page.

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