As the economic tumult continues, news stories about businesses considering filing bankruptcy continue.

So what does it mean when a major company seeks the protection of the bankruptcy court?

Like personal bankruptcy, it depends what chapter the business files under.

Chapter 11 Bankruptcy

Chapter 11 is almost exclusively used by businesses in financial difficulty.

Like Chapter 13 bankruptcy for individuals, Chapter 11 allows businesses to reorganize their debts.

As with individual filings, the automatic stay protects companies during the process.

Notable differences between Chapter 11 and Chapter 13 bankruptcy include:

• If a company is worth less than it owes - that is, its debts exceed its assets - ownership of the company reverts to the creditors after bankruptcy reorganization. This means that the company’s “owners” exit bankruptcy owning no part of their company.
• A company can be in Chapter 11 for as little as a few months or as long as several years – it depends on the complexity of the plan agreed upon by interested parties.
• Stocks for a company are generally delisted after a Chapter 11 bankruptcy filing. This means that shareholders are left with valueless stocks.

When a company is filing bankruptcy under Chapter 11, it can usually still conduct business, and, as a consumer, you may not notice too many differences in day-to-day operations.

Chapter 7 Bankruptcy

As with personal filings, Chapter 7 bankruptcy for companies take the form of liquidations. This means that the court-appointed bankruptcy trustee sells off a company’s assets to raise money to pay off creditors.

Unless the company’s trustee opts to continue daily operations, many companies shutter their doors after filing under Chapter 7.

Notable differences between Chapter 7 for individuals and Chapter 7 for businesses include:

• Businesses do not receive a Chapter 7 discharge. Once the bankruptcy case is over, the businesses still owe any debts not satisfied by liquidation (until statutes of limitations expire).
• After completing a Chapter 7 case, businesses are dissolved, meaning that they no longer exist as they did before filing.

Chapter 7 bankruptcy is typically used for companies with serious debt, but a company’s filing doesn’t necessarily mean that the company’s employees will all lose their jobs – in some cases, entire units of operation are sold as part of the liquidation sale.

Tags: Chapter 11 bankruptcy, chapter 13 bankruptcy, chapter 7 bankruptcy, filing bankruptcy