What Is the Difference Between Chapter 7 and Chapter 11 Bankruptcy for a Business?

If a business struggles with overwhelming debt, the owner may consider Chapter 7 or Chapter 11 bankruptcy. These two types of bankruptcy have very different outcomes. For a business owner, understanding the difference between Chapter 7 and Chapter 11 bankruptcy is essential to making a fully informed decision before moving ahead.

Control of the Business and the Bankruptcy Process

In the U.S. Bankruptcy Code, Chapter 7 is titled Liquidation. The title of Chapter 11 is Reorganization. Under Chapter 7, a trustee appointed by the bankruptcy court liquidates (sells) the assets of the business to pay the debts; the business is usually dissolved at the end of the process. In stark contrast, Chapter 11 gives a business the opportunity to continue to operate and to reorganize, restructure debts, and emerge as a viable, more efficient, and stronger entity.

The main difference between Chapter 7 and Chapter 11 bankruptcy lies in control over the business during the bankruptcy process. In Chapter 7, a panel trustee appointed by the bankruptcy court has full control. In Chapter 11, control remains with the business or business owner(s) throughout the bankruptcy process.

Chapter 7 is almost never the right way to go for a business, primarily because the Chapter 7 trustee will look to the business owners for any improper transfers or wrongdoing. Typically, the trustee shuts down the business immediately, with no opportunity for the business to run for a short amount of time and then be sold. Finally, there is no discharge for a company in a Chapter 7 bankruptcy.

Conversely, in a Chapter 11 bankruptcy, the business or business owner becomes a debtor in possession and retains full control of the business during the bankruptcy. Most often, the business continues as usual, while it reorganizes, restructures its debts, and deals with various issues in litigation during the bankruptcy process. What is not as well known is that a sale of the business or the business assets can occur in a chapter 11 bankruptcy. A Chapter 11 debtor in possession can take the time to run the business for at least several months, market the property or business properly, and then conduct an organized sale without having an outside party dictating the terms.

Bankruptcy Process

The bankruptcy process is very different for Chapter 7 and Chapter 11 bankruptcy.

In Chapter 7, a trustee appointed by the bankruptcy court handles asset liquidation and payment of creditors. Business operations come to a halt when the bankruptcy petition is filed. Typically, the business is dissolved at the end of the process. However, the business does not receive a discharge.

In Chapter 11, the business or business owner becomes a debtor in possession with fiduciary responsibility to continue business operations. A trustee is not appointed in most Chapter 11 cases. The owner controls day-to-day operations and makes decisions about retaining or voluntarily surrendering assets. The Chapter 11 bankruptcy process requires the owner to develop a reorganization plan to repay creditors over time (usually three to five years, but sometimes longer), which must be approved by the creditors’ committee and the bankruptcy court. On successful completion of a Chapter 11 reorganization, the business receives a discharge.

The Chapter 11 bankruptcy process provides a business with the opportunity to reorganize and restructure while under the protection of the bankruptcy court. Successful completion of Chapter 11 enables a business to emerge from bankruptcy with more efficient operations and eliminate the burden of various legal issues. Chapter 7 does not provide those opportunities and benefits to a business or business owner.

Small businesses may be eligible for a special process under Chapter 11, Subchapter V of the Bankruptcy Code. Small business bankruptcy under Subchapter V is more streamlined and less costly than the standard Chapter 11 process but provides the same opportunities and benefits for an eligible small business.

Choosing Between Chapter 7 and Chapter 11 Bankruptcy

A business that has reached the point of considering bankruptcy should explore all options and understand the full implications of both Chapter 7 and Chapter 11 business bankruptcy before making a decision about how to proceed. Liquidation under Chapter 7 is rarely a good choice for a business, except in limited situations. Chapter 11 can be used to achieve financial stability through reorganization and debt restructuring. For a business considering bankruptcy, getting an objective analysis from an experienced bankruptcy lawyer is the most sensible approach for choosing the appropriate type of bankruptcy for the unique circumstances of the business and the owner.

Our practice at Wernick Law focuses on representing businesses and individuals in Chapter 11 bankruptcy. Filing a Chapter 11 petition does not guarantee a successful outcome, but having guidance from an experienced lawyer gives a business the best chance for obtaining a Chapter 11 bankruptcy reorganization.

Connect With an Experienced Florida Chapter 11 Lawyer

Wernick Law welcomes Florida businesses and business owners wishing to learn more about Chapter 11 reorganization bankruptcy or Subchapter V, Chapter 11 small business reorganization 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.