Chapter 11 bankruptcy is a powerful tool for business owners and high-income/debt individuals seeking bankruptcy relief. Some debtors prefer Chapter 7 bankruptcy because it allows a simple liquidation and discharge of debts giving the debtor a relatively quick fresh start. But there are some essential differences and benefits of Chapter 11 bankruptcy that debtors should be aware of when considering bankruptcy.
#1 – When a debtor/business owner files Chapter 7 bankruptcy he/she is appointed a trustee who basically becomes the “owner of the business. In Chapter 7 bankruptcy the trustee’s sole purpose is to liquidate the assets of the debtor/business and use the cash to pay creditors in accordance with the bankruptcy code.
#2 – When a debtor files Chapter 11 bankruptcy, he/she retains control over his/her business and can choose to liquidate or restructure the debt. Chapter 11 bankruptcy also allows the business owner to negotiate with his/her creditors to reduce their debt burden.
#3 – When a debtor files for Chapter 11 bankruptcy he//she can request that certain contracts (such as labor contracts) be terminated freeing up more of the debtor’s cash. This is how GM and Chrysler moved to terminated several labor related contracts that would have been nearly impossible to terminate outside of bankruptcy.
#4 – When a debtor files for Chapter 11 bankruptcy, a valuation of the company will be made and the debtor will typically be charged by the bankruptcy attorney based on a percentage of that valuation. Those bankruptcy attorney charges must be approved by the bankruptcy court.