Make It Go Away or Make It Better? The Difference Between Liquidation vs. Reorganization

When financial difficulties go from bad to worse and the best solution is simply to start over, both individuals and companies have a choice between a “liquidation” form of bankruptcy (in which all unsecured debts are wiped out), and one that allows them to reorganize and repay a percentage of their debts in a court-approved repayment plan. In this blog, we’ll examine these two bankruptcy types and how they differ in the way they offer debt relief.

Liquidation

Chapter 7 bankruptcy is commonly referred to as a “liquidation” type because filers may have nonexempt assets seized by their trustee and sold to help repay creditors. The court will decide which creditors get how much money from this asset liquidation. All remaining debt is discharged, except for certain “nondischargeable” types such as child support, alimony, and student loans.

Although both individuals and companies may file for Chapter 7, the outcome is different for each one. With an individual, the discharge leaves them free to start over and rebuild their finances. With companies, the business is permanently dissolved once assets are liquidated and creditors receive the proceeds.

Reorganization

Chapters 11, 12, and 13 are all regarded as “reorganization” bankruptcies because those who file have the opportunity to restructure their debt payments to their creditors. A reorganization bankruptcy does not typically eliminate the debts themselves, but allows filers to propose a three to five year repayment plan that makes their debt load more manageable.

Unlike Chapter 7, no property has to be surrendered for distribution and sale, and if the debtor is behind on a secured obligation such as a mortgage or car payments, the arrears can be repaid in the payment plan. Businesses that file can continue operating normally. As a result, reorganization bankruptcies are a preferred option for those who are temporarily experiencing financial difficulties but in a position to maintain payments going forward. Once the terms of the repayment plan are satisfied, all unsecured debts are discharged.

Chapter 13 is the most commonly filed reorganization bankruptcy, with 296,655 filings in 2016. Chapter 11 is another type that is primarily utilized by business entities, although individuals with a debt load that exceeds the limit for Chapter 13 can opt for a Chapter 11 reorganization. Chapter 12 is not available to individual debtors—its purpose is to provide bankruptcy protection to businesses of a specific type, such as family farmers and fishermen.

The best bankruptcy type for your situation depends on factors such as debt amounts, your income level, and whether you are filing as an individual or a business. For assistance in making the right choice for your circumstances, contact Attorney B. David Sisson for a no-obligation consultation today.

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