Liquidation vs. Reorganization: An Overview

Bankruptcy can be a scary idea for most businesses, but in reality, it’s just another instrument you can use to succeed. Understanding what bankruptcy options mean for your business is an important step in removing the fear and comprehending the benefits. We at Cutler & Associates are here to give you in-depth information you can use for your business. To begin, let’s talk about the two different branches of bankruptcy – liquidation and reorganization.

What Is Liquidation?

Liquidation is the type of bankruptcy found when you file for Chapter 7 of the U.S. Bankruptcy Code. It’s either forced upon your business by your company’s creditors, or you can choose this option for yourself.

Liquidation means that all your company’s assets are sold by an appointed trustee to bring in cash to pay back as much of your debt as possible to those that you owe. After your assets have been distributed, your business is permanently dissolved and your stock no longer has value. Dissolution usually means that your employees will lose their jobs, but if your company is large enough, you can always sell off individual divisions to other companies to keep your workers employed. The liquidation process of a Chapter 7 bankruptcy can take many months, with creditors normally getting back very little of what they’re owed.

What Is Reorganization?

Reorganization is the type of bankruptcy that falls under Chapter 13 or Chapter 11 of the U.S. Bankruptcy Code. Both chapters can be used by individuals, but business entities can only utilize Chapter 11.

Reorganization is used to protect a business when their debts exceed their assets and they don’t have the funds to pay them back. Therefore, insolvent companies often file for Chapter 11 bankruptcy. With reorganization, a business owner usually retains possession of his or her business, giving it a distinct advantage over Chapter 7. The owner can continue to run the company as a “debtor in possession” and an “automatic stay” will cause all litigation against the company to pause until after a business emerges from bankruptcy or it is resolved in bankruptcy court.

When you’re ready to discuss your bankruptcy options or alternatives, Cutler & Associates Ltd are just a phone call away to talk about your specific needs. Our goal is to keep you from feeling hopeless about your financial future and to find the right solution to get you back on track. Contact us today.