Difference Between Liquidation and Reorganization in Bankruptcy

A Certified Receivables Compliance Professional (CRCP), Jonathan Koop established Bankrupt Debt Acquisitions, where he also serves as CEO. Jonathan Koop specializes in the purchase and management of bankruptcy receivables.

The US bankruptcy law is covered by Title 11 of the United States Code. Under it, courts of law serve as a forum where various creditors can sort out their claims against the assets of a debtor when the assets are not sufficient to fully pay all the claims. The Bankruptcy Code also provides a lifeline for the debtor to reorganize and discharge pre-petition debts.

Generally, bankruptcy takes two forms: liquidation and reorganization. Here are their basic differences.

Liquidation, which is covered by Chapter 7 of the Bankruptcy Code, takes an inventory of all of the available assets of the debtor so that they can be sold through an appointed trustee. The proceeds are used to pay as much debt as possible. When these have been fully distributed, the debtor’s business is dissolved and its stock no longer has any value.

Reorganization is covered by Chapter 11. Reorganization protects a business when the value of debts exceeds the value of assets, and there are no available funds to pay the debts. Under Chapter 11, the owner retains possession of the business and continues to operate as a “debtor in possession.” The principle of “automatic stay” takes effect, which postpones all litigation and legal claims against the business until the time the company emerges from bankruptcy, or until the bankruptcy is resolved by a bankruptcy court.

Chapters 7 and 11 are available to both businesses and individuals. Chapter 13 is another reorganization program available to individuals or sole proprietors only.