Businesses may end up struggling financially for many different reasons. Perhaps there has been a sudden surge in material costs when a business had already locked in client prices, forcing the company to take a loss on several large projects. Perhaps there has been a drop in demand, which means that the company’s revenue has decreased sharply and unexpectedly.
The purpose of most businesses is to generate profit, so when they are no longer able to do that, the owners or executives running them often have to make difficult choices. Bankruptcy can be a useful tool during times of economic strain for a business. Bankruptcy can lead to the discharge of certain business debts and can help a company prevent aggressive collection efforts. Is Chapter 11 or Chapter 7 bankruptcy the right choice for a business in distress?
Chapter 11 can help keep a company operational
For those hoping to keep a company open and to bring it back into the black, Chapter 11 bankruptcy is often the best option. In a Chapter 11 filing, the business will undergo reorganization. There will be an opportunity to negotiate debts with creditors and a chance to streamline business operations so that the company is less expensive to run and will ultimately become more profitable. Chapter 11 proceedings are useful when companies need to downsize or completely readjust their business operations in the hopes of becoming solvent again.
Chapter 7 bankruptcy helps closing businesses
In a Chapter 7 bankruptcy, a business may have to liquidate some of its equipment and other assets to repay creditors before receiving a discharge of eligible debts. The trustee appointed by the courts will decide how to sell off and liquidate those resources and repay creditors. Although some companies are able to continue operating after a Chapter 7 bankruptcy, the trustee’s management of business resources may make it much harder for the company to rebuild after the courts discharge some of its debts.
Ultimately, the goal of the bankruptcy process and the cause of a company’s financial challenges will both influence which type of bankruptcy is the right choice for that business. Discussing a company’s finances and future with a bankruptcy lawyer can help an owner or executive choose the right form of business bankruptcy for the situation at hand.