Free Enterprise - The FindLaw Small Business Law Blog

What Is Chapter 11 Liquidation?

If you're a small business owner pondering bankruptcy, you have a few filing options. While some would mean an end to your entrepreneurial dream, others may let you continue to operate your business while paying off your debts. And if you're not willing to say goodbye to your small business yet, you may consider filing for Chapter 11 bankruptcy.

Generally, Chapter 11 is intended for the reorganization of businesses with significant debt, and may allow your small business to propose a plan for profitability post-bankruptcy and continue to operate while temporarily keeping your creditors at bay. And while most Chapter 11 filings don't include liquidation of the business's assets, it may be permitted in some cases. Here's a look.

Liquidation Availability

For the most part, small business owners choose Chapter 11 over Chapter 7 specifically to avoid asset liquidation. While Chapter 7 filings normally entail a complete shutdown of the business and a selloff of all assets in order to repay the debt, the goal of Chapter 11 is to maintain business operations and repay the debt over time.

That said, it is possible to have liquidation under Chapter 11, and it may benefit debtors and creditors more than Chapter 7 liquidation:

In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a chapter 7 liquidation. It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case.

Liquidation Pros and Cons

Any Chapter 11 reorganization plan must be approved by creditors holding at least two-thirds of the total debt amount and more than one-half of the total number of claims. So it's no guarantee that a majority of your creditors will sign off on a liquidation plan. Then again, some of those creditors may favor liquidation if they think it means they're more likely to get repaid.

While there can be benefits to liquidation under Chapter 11 as opposed to Chapter 7, there can be some drawbacks as well. It should be noted that a Chapter 11 liquidation plan does not discharge all of your small business debts.

The bankruptcy code is complex and filing a Chapter 11 plan that creditors will accept can be tricky. For help filing a bankruptcy plan or even deciding which type of bankruptcy is right for your small business, contact a local bankruptcy attorney.

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