The Borders bankruptcy case currently making headlines provides a helpful illustration of the difference between the two main forms of bankruptcy, reorganization and liquidation. Here’s a look at what we can learn about personal bankruptcy from the Borders situation.
Reorganization: Chapter 11 and Chapter 13 Bankruptcy
Reorganization bankruptcy is exactly what its name suggests: it allows filers to reorganize their debts and assets to catch up on overdue payments. When a business files for reorganization (usually under Chapter 11 of the U.S. Bankruptcy Code):
- It continues operating. Some store branches may close and the company may “streamline” its operations to make itself leaner and more likely to turn profits when the bankruptcy concludes.
- It repays creditors. Chapter 11 cases, like Chapter 13 cases, include a plan that allows the filing company to compensate its creditors at least in part for its debts.
- It tries to emerge stronger. The goal of a business reorganization is to trim the fat and let the company get back on its feet with a more workable model.
The Borders situation, though, seems unable to benefit from a Chapter 11 bankruptcy. Sources suggest that this is because of a number of factors, including the weak economy, the changing face of books and the fierce competition it faces from online booksellers.
When an individual enters a reorganization plan (usually under Chapter 13 of the U.S. Bankruptcy Code), she also makes payments to her creditors. At the end of the repayment period (usually three to five years), her goal is to emerge debt-free and with financial habits that will keep her that way.
Liquidation: Chapter 7 Bankruptcy
When a company liquidates (under Chapter 7 of the U.S. Bankruptcy Code), it sells off its assets and ceases operations. In other words, if Borders does indeed file for Chapter 7 bankruptcy, it will no longer be around. Business liquidations usually:
- Involve a sale: This might come in the form of an “everything must go” sale of merchandise in stores, an auction to other businesses, or some combination of the two.
- Lead to partial repayment: The proceeds from the sales are generally used to repay in full or part any creditors to which the company owes money at the time of filing.
- Mean job losses: In Borders’ case, the company would have to close its 399 remaining stores and likely lay off the more than 10,000 people it currently employs.
Individuals who file for Chapter 7 usually don’t have enough income to make repayments to creditors. The liquidation part of an individual bankruptcy filing involves the bankruptcy trustee selling a filer’s non-exempt assets to raise money to repay creditors in part.