There are two main types of bankruptcy protection for businesses: Chapter 7 and Chapter 11. Sometimes known as liquidation bankruptcy, Chapter 7 requires a business to sell off assets in order to partially satisfy creditors. For this reason, Chapter 7 is most commonly used when a business is winding down its operations.
By contrast, Chapter 11 is known as a reorganization bankruptcy. Chapter 11 gives a business protection from its creditors while it restructures its debts and reorganizes its operations in order to return to profitability.
Businesses large and small
Many large and small retail businesses have filed for Chapter 11 in recent years, and large corporations such as General Motors and United Airlines have used Chapter 11 to reorganize and return to financial stability. In some cases, individuals have been able to avail themselves of Chapter 11, but these individuals are almost always famous athletes, entertainers or other celebrities. The media attention to these individuals may give the impression that Chapter 11 is commonly used among individuals, but in fact individual filers for Chapter 11 are exceedingly rare.
In most cases, a business can continue to stay open during Chapter 11 proceedings, but a bankruptcy court steps in to make sure the business is being run in a way that will benefit creditors. With this in mind, a business going through Chapter 11 cannot take certain actions without getting court approval. These include sales of certain types of assets, taking or cancelling of leases and certain contracts with vendors and employees.
The Small Business Reorganization Act of 2019, which went into effect earlier this year, made a few changes that were intended to make it easier for small businesses to reorganize through Chapter 11. Qualifying businesses must have less than $2.7 million in debt, and must meet other criteria.
Chapter 11 is typically the most complex and expensive form of bankruptcy, but it can be a powerful tool to pull a business out of financial trouble while keeping the business running.Business owners should thoroughly discuss all their legal options with a lawyer with experience in business bankruptcy.