Even though Chapter 11 allows for reorganization and continued operation, some businesses just opt for Chapter 7 instead. Here’s why:
1. Business Has No Path to Profitability
- If the company is deeply in debt with no realistic way to recover, it doesn’t make sense to reorganize.
- Chapter 7 allows the business to shut down cleanly, deal with demanding creditor claims, disgruntled customers, and allow a bankruptcy trustee to possibly liquidate assets to pay creditors.
- The owner(s) of the company should ask themselves if they have the time, energy and desire to reorganize their company.
💬 “Why keep fighting a losing battle?”
2. Can’t Afford Chapter 11 Costs
- Chapter 11 is generally more complex and more expensive — legal fees, accountant fees, and court costs add up as a chapter 11 case can take 8-12 months to complete.
- The company needs to have organized financials and a bookkeeper or someone who can provide ready financial statements to the court.
- Small businesses often can’t afford the legal burden of developing and negotiating a reorganization plan.
3. Need a Faster Resolution
- Chapter 11 can take at least 8 months or more to complete.
- Chapter 7 is quicker — usually 2-3 months with most of the work being the first month before and the month after filing.
4. Owner Wants to Walk Away
- If the business is a sole proprietorship or closely held company, the owner might just want to cut its losses and move on.
- Chapter 7 lets them close shop and just provide documentation and information to a bankruptcy trustee. Just let the bankruptcy trustee and the court wind down the company and deal with creditors.
5. No Funding to Operate During Bankruptcy
- Chapter 11 requires some cash to keep the business running during restructuring. It will be hard to get any financing so the company needs to have some reserves going into the bankruptcy and also be able to generate some profit going forward.
- If there’s no money left to operate, reorganization isn’t feasible — Chapter 7 is the fallback.
When Chapter 11 BANKRUPTCY Doesn’t Work:
If the business has no valuable brand, no future, or no realistic plan to become profitable — there’s nothing to reorganize.
Call David A. Arietta, Esq. at (925) 472-8000 to go over any options for filing for bankruptcy relief.