When small businesses in North Carolina face financial issues to the extent that they are unable to pay their debts, bankruptcy can be an important option to find debt relief and move forward toward a different financial future. However, small business owners may be unsure about which type of bankruptcy is best suited for themselves and for their companies. There are two primary bankruptcy options available for companies: Chapter 7 and Chapter 11. The choice of bankruptcy options may have a significant effect on the potential future of any small business.
Chapter 7: Liquidation bankruptcy
A Chapter 7 bankruptcy is also called a liquidation bankruptcy. Here, the business’s assets are sold off in order to pay off creditors. Businesses in Chapter 7 are considered to be past the stage where reorganization is possible; instead, a trustee is appointed to pay off creditors in priority order, privileging secured debt over unsecured debt. After all assets are exhausted, remaining debt is generally forgiven.
Chapter 11: Restructuring bankruptcy
On the other hand, Chapter 11 bankruptcy is also referred to as reorganization bankruptcy. The trustee works to restructure debts and take initiatives to stabilize corporate finances. This can include selling off assets, but it is not a liquidation process. In 2019, the Small Business Reorganization Act was adopted, which added a clause that aims to make Chapter 11 bankruptcy an easier, faster option for small businesses. Small businesses are those that have less than $2.7 million in debt and can benefit from shorter deadlines and greater flexibility in negotiating debt obligations.