Chapter 11 vs. Chapter 7 Bankruptcy will be determined by whether or not you have a business. Sometimes a company may get to the brink of bankruptcy. This situation may be brought about by different factors combining over a period in time. Many different measures can be taken to avoid reaching the stage of bankruptcy but if all else fails then the company must apply for bankruptcy to protect itself from its creditors. Companies normally file for bankruptcy using laws in chapter 11.
Chapter 11 vs. chapter 7 is more lenient. This is because chapter 11 deals with rehabilitation bankruptcy while chapter 7 deals with liquidation bankruptcy. Rehabilitation gives a company time to improve its situation up-to the point that it can be financially healthy enough to compete in the market. It can do this by renegotiating with its creditors allowing for more time on debt payments. Liquidation is selling of the companies assets in an effort to pay off the creditors and this sounds a death knell for most companies. Chapter 11 is therefore much more business friendly.
In chapter 7 the trustee oversees the sales of the assets of the company. Debtors are paid according to the manner in which they lent their money to the company. They have to wait until the company assets are sold off to be paid i.e. firstly secured loans then unsecured loans. Debtors may remain unpaid if the assets do not fetch the required amounts to pay them off. The role of the chapter 11 trustee is to take care of the company’s assets as work continues. Here the trustee ensures that creditors are paid as the company continues to operate. Chapter 11 is therefore better for creditors because they have a better chance of getting back their money from the subsequent income of the company.
Chapter 11 ensures improvement in company performance. This is because since the company is has been given a second chance it shall seek to do business in new and better ways than before. It may end up doing better than previously and restoring the confidence of its customers. Chapter 11 is better because it offers the second chance for companies to use more efficient business practices and to eradicate harmful business practices.
An 11 also provides a company room to breathe as it continues to pay off their creditors. Chapter 11 is more lenient because it does not have finality for the business. Under this chapter, a company can get new loans structured in such a way as to give the lender the first priority in its profits. This can breathe life into the flailing company. 11 is better because it also retains employment for most of its employees who would be rendered jobless on filing for chapter 7.
Ultimately, the business gets to save face. This is because when a company files for bankruptcy the perception that the public get is that the management was unable to perform. This can be particularly so under chapter 7. Even though chapter 11 may still cause some humiliation, the company management are given a second chance to prove themselves and regain the good will of the public.