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Business bankruptcy: Deciding between Chapter 11 and Chapter 7

If you own a business that’s in financial trouble and headed toward bankruptcy, you need to decide whether to file Chapter 11 or Chapter 7. Pursing a Chapter 7 will mean the end of your business and the liquidation of assets, but the process will be over relatively quickly and efficiently. Chapter 11 allows you to restructure and keep your business open, but it is a much longer and more complex process. And it isn’t always successful.

So how do you choose one over the other? That’s what we’ll discuss in today’s post. If you are leaning toward Chapter 11, you’ll need to answer the three questions below (in consultation with an experienced bankruptcy attorney, of course). 

Is the business’ revenue potential worth more than its liquidation value?

In some cases, a bankrupt business still has significant revenue potential, meaning that it is worth more than the value of its liquidated assets. In such cases, a Chapter 11 might be appropriate. But if a business has little revenue potential, liquidation bankruptcy (Chapter 7) would be a better choice.

Why is the business in financial trouble? Can the problems be fixed?

Bankruptcy and financial trouble are not always the result of bad decisions and poor management. In many cases, the problems could not have been predicted. But it is nonetheless very important to determine why the problems occurred and whether they can be fixed.

Let’s say, for instance, that two companies are drowning in debt. The first company is in debt because it tried to expand too quickly. Other than that mistake, however, the business is popular and profitable. The second company is in debt because sales have been declining for years due to competition from online retailers and competitors in a very saturated market.

After hearing these details, it seems clear that the problems the first company is facing can be fixed. The second company’s problems, however, probably cannot be fixed.

Can the business owner make the necessary changes?

Reorganizing in Chapter 11 requires difficult decisions, sacrifice and a willingness to make major changes. For some business owners, those costs are worth it to keep the business alive. For others, they are not. Neither decision is necessarily right or wrong, but you’ll need to decide for yourself if you have the qualities mentioned above and the drive to keep your business going through Chapter 11.

If you have questions about business bankruptcy or want to discuss your options, please contact an experienced bankruptcy attorney in your area.

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