When a business that is under significant financial stress considers bankruptcy as an option for liquidating assets, Chapter 7 is the type of bankruptcy that first comes to mind. However, Chapter 11 bankruptcy can also be used to liquidate some or all of the assets of a company. The two types of bankruptcy liquidation are substantially different. Our bankruptcy lawyers at Wernick Law work with businesses to help them determine whether bankruptcy liquidation is the most suitable way to address overwhelming debt, and, if it is, whether Chapter 7 or Chapter 11 provides the most advantageous alternative.

Liquidation of a Business Under Chapter 7

When a business files a petition for Chapter 7 bankruptcy, a panel trustee appointed by the bankruptcy court takes full control of all the assets of the business and of the bankruptcy process. Most often, the trustee closes down the business immediately and liquidates (sells) all the assets as quickly as possible. The debtor has no opportunity to run the company for a short time before selling assets and also has no control over the liquidation process.

Liquidation of a Business Under Chapter 11

In sharp contrast to the Chapter 7 process, a Chapter 11 bankruptcy allows the debtor to continue business operations during the bankruptcy case and to control the bankruptcy process, including any liquidation of assets that occurs. In most cases, a business chooses Chapter 11 over Chapter 7 to avoid asset liquidation, but in some circumstances, Chapter 11 may enable a business to liquidate assets in whole or part under more advantageous circumstances than a Chapter 7 liquidation. The Chapter 11 process follows the same basic process as a standard Chapter 11 bankruptcy.

A Chapter 11 case begins with filing a petition for bankruptcy in the federal bankruptcy court where the debtor has a domicile, residence, or principal place of business. The petition includes detailed schedules relating to the financial situation of the business. Filing the petition creates an automatic stay that prohibits most creditors from pursuing payment requests, collections, eviction, foreclosure, and other property seizure and collection processes. The business becomes the debtor in possession after the petition is filed.

Unless the business requests and receives an extension, a Plan of Reorganization and a Disclosure Statement must be submitted to the bankruptcy court within 120 days after the petition is filed. When a business wishes to liquidate under the Chapter 11 process, the Plan of Reorganization includes the details proposed for the liquidation, which may include some or all of the business assets.

The Reorganization Plan must be reviewed and approved by a creditors’ committee and ultimately by the bankruptcy court. When the Plan includes proposals for liquidation, those terms are part of the review. There is no guarantee that the proposed plan will receive the required approvals. If the bankruptcy court determines that the legal requirements for a Chapter 11 Reorganization Plan cannot be met, the court may convert the case to a Chapter 7 liquidation. Developing the liquidation terms in the Plan and navigating the approval processes are critical reasons why representation by legal counsel is essential for a business pursuing Chapter 11 liquidation.

Choosing Between Chapter 7 and Chapter 11 Liquidation

In Chapter 11 liquidation, the debtor controls both business operations and the liquidation process, which is not the case in a Chapter 7 bankruptcy. Since Chapter 11 contemplates continuation of business operations during bankruptcy, a Chapter 11 liquidation may enable a business to sell the company as a going concern or sell parts of the business separately, which may make it worth more than a business that has stopped operating. When a business wants to wind down but there are still valuable assets in the company, Chapter 11 may provide more control to the debtor, and the flexibility of Chapter 11 liquidation may result in a better outcome for the business than Chapter 7.

Before making a final decision to file bankruptcy and liquidate assets, a business should make an informed assessment about Chapter 11 liquidation versus Chapter 7 liquidation. Both options have advantages and disadvantages. The best way to get an accurate evaluation is to consult with a bankruptcy lawyer. Our Chapter 11 bankruptcy lawyers at Wernick Law have the experience and skills to help businesses make the right choice when filing for bankruptcy.

Connect With an Experienced Florida Chapter 11 Lawyer

Wernick Law welcomes Florida businesses wishing to learn more about the firm’s Chapter 11 reorganization bankruptcy practice, small business bankruptcy under Chapter 11, subchapter V, or individual bankruptcy under Chapter 11 to schedule a consultation by calling 561-961-0922 or using the online contact form. Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.