Frequently, business leaders contemplating bankruptcy choose Chapter 7 if they intend to close their company and Chapter 11 bankruptcy when they want to restructure the company to regain solvency. However, there is a specific scenario in which those anticipating the closure of a company might still opt for Chapter 11 or reorganization bankruptcy. They create a structured plan during bankruptcy instead of seeking the fastest discharge possible.
Why do those intending to close a company tend to choose a formal restructuring process over the much faster Chapter 7 bankruptcy process?
The goal may be to optimize asset liquidation
The liquidation of business resources that occurs in a Chapter 7 bankruptcy is often relatively rapid. The company may complete the entire bankruptcy process in a matter of months, which may limit the return secured on the sale of critical resources.
A Chapter 11 bankruptcy can be a better option when the company owns valuable resources and requires time to optimize the return on their sale. In cases involving real property and costly equipment, a Chapter 11 bankruptcy may allow for a structured resource liquidation process that ultimately results in the repayment of more debts before the final discharge at the end of the bankruptcy process.
When repaying debts is a priority, Chapter 11 bankruptcy may be the better option. Especially in cases where the debts owed by the company may include back wages to employees, business leaders may recognize that attempting to extract the optimal value from liquidated resources is the best path forward.
A Chapter 11 filing can be beneficial for those intending to dissolve a company, especially if there are high-value resources that could prove challenging to sell quickly. With that said, working with a legal professional is helpful regardless of what form of business bankruptcy company leaders choose.