On behalf of Pakis, Giotes, Page & Burleson, P.C.
Do All Business Bankruptcies Result in Liquidation?
We often hear about businesses going into bankruptcy and never coming out of one, so many people tend to believe bankruptcy spells the end of a company. However, this is not always the case. While some Texas businesses never emerge from bankruptcy to continue their operations, others successfully reorganize, get out from under the burden of debt, and return to profitable status.
Chron explains the difference between a business liquidating and a business emerging. Bankruptcies that involve liquidation are Chapter 7 bankruptcies. Chapter 7 is the most commonly used form of bankruptcy. Business owners know going in that the bankruptcy will liquidate their operations. However, company owners who want to save their companies may choose Chapter 11, which allows companies to continue operating while they reorganize.
Liquidation in bankruptcy means that a bankruptcy trustee and other actors involved in the business, like shareholders and creditors, have determined that the business is unlikely to return to solvency. Therefore, the business will cease all business operations and sell off its assets to pay off its debt. Generally, a bankruptcy judge will discharge some of the business debt, meaning the company will not have to repay those debts.
Some businesses manage to avoid liquidation. Even with a lot of debt, a business may still reorganize its assets and debts while creating a repayment plan that compensates many of its creditors. To emerge from bankruptcy, a bankruptcy court and creditors must agree with the reorganization plan. Afterward, the bankruptcy judge will file the last decree of the bankruptcy.
Emerging from bankruptcy allows a business to continue functioning, but successfully emerging out of bankruptcy can be challenging. Businesses generally have to pay more of their debts under emergence than liquidation. The costs involved with going through reorganization under Chapter 11 may be too much for some business owners, so they go through Chapter 7 liquidation instead so they can start over with a new company.