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Comparing Chapter 7 to Chapter 11 business bankruptcy

Any business in Louisville could one day find itself facing hard financial times. Factors, such as the economy, can make it so that a once flourishing business is now struggling to keep its doors open. When that happens, the owners of the business may want to pursue either a Chapter 7 or a Chapter 11 bankruptcy. What are the differences between these two types of business bankruptcy?

A business may determine that filing for Chapter 7 is appropriate if it believes that simply closing its doors is the best option. A Chapter 7 bankruptcy is sometimes called a liquidation bankruptcy. In general, it is used when a business' debts are so high that restructuring them is not really an option, or it is used if the business itself does not have any significant assets.

In a Chapter 7 business bankruptcy, a trustee, chosen by the court, will take possession of the business' assets and then will use them to pay off the business' creditors. After that, the debts will be discharged, if the debtor is a sole proprietorship, meaning they do not have to be repaid. However, a discharge of debts is not an option for partnerships or corporations.

A Chapter 11 bankruptcy may be an option for businesses that still want to keep their doors open after filing for bankruptcy. In a Chapter 11 bankruptcy, the business reorganizes and continues operations.

A trustee is appointed by the court to reorganize the business. A plan of reorganization lays out how debts will be paid back to the business' creditors over a certain period, sometimes lasting as long as 20 years. It is filed with the court and voted on by the business' creditors. If the court believes the reorganization plan submitted is fair and appropriate, it will allow the plan to move forward.

Whether filing for Chapter 7 or Chapter 11, businesses should understand that filing for bankruptcy is a big step, and is a complex process that they may not want to handle alone. Instead, they may want to consult with a business bankruptcy attorney to ensure they understand what to expect from the bankruptcy process and how to move forward.

Source: The Balance "What is Business Bankruptcy?," Rosemary Peavler, June 15, 2016

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