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Chapter 7 vs. Chapter 11 for small businesses

On Behalf of | Sep 20, 2022 | BANKRUPTCY LAW - Business & Commercial Bankruptcy

Small businesses troubled by debt may soon become insolvent. Bankruptcy protections might be an Idaho owner’s best path forward. Two options are Chapter 7 and Chapter 11, and one might be preferable or accessible.

The Chapter 7 option

Chapter 7 bankruptcy refers to the liquidation of assets to pay creditors. So, if a business has funds in a money market account, the bankruptcy court may require the owner to direct the funds to pay some debts. The court might also order non-exempt assets to be liquidated, such as a second car. The court could even require the owner’s only vehicle to be sold minus the established exemption amount.

That said, liquidation bankruptcy is not intended to leave the debtor destitute. Some assets, however, must cover obligations. Typically, the court requires payments towards secured debts while discharging some or all unsecured ones.

Opting for Chapter 11

Chapter 11 could be a preferable plan for companies generating sufficient revenue to support the reorganization. Specifically, under bankruptcy law statutes, the court reviews and potentially approves a plan to repay creditors over several years.

Restructuring involves the reduction of the debt owed to creditors. For some, receiving a portion of the debt owed would be better than receiving nothing due to defaults and engaging in litigation that might prove fruitless. However, some unsecured debts may be entirely discharged by the court.

Chapter 11 provides a way to deal with crushing debt while remaining fully operational for a financially troubled company. After bankruptcy, the company might be in fiscally sound shape and capable of resuming normal operations.