Meaning of Chapter 7 liquidation and Chapter 11 reorganization
Chapter 7 liquidation entails a bankruptcy proceeding whereby a company or any other business organization closes all its operations and completely get out of business. Essentially, liquidation involves converting sellable company’s assets into cash. Therefore, Chapter 7 liquidation is a procedural undertaking which involves appointing a trustee to liquidate or sell the assets of the company that has been declared bankrupt, and use the proceeds from that liquidation to clear the debts owed by the company. The Chapter 11 of federal bankruptcy law is a legal proceeding in which companies are required to reorganize themselves. Reorganization of companies implies that companies that have been declared bankrupt are required to reorganize their business in order to restore their profitability (Corbae and Pablo 18). An example of a company that has gone through Chapter 7 is the Lehman Brothers. This company was declared bankrupt during the 2007-2008 financial crisis. Debtors filed the petition with the court since the company had been able to finance its debts as a result great financial loss caused by the occurrence of the global financial crisis (Ross n.p).
Liquidation or reorganization decision from a creditor’s stand point
As a creditor, the best option would be to reorganize the company instead of liquidating it. Creditors understand the circumstances that lead to the declaration of their companies as bankrupt. Additionally, creditors understand the strategies they can deploy to restore the profitability and creditworthiness of their businesses. If a creditor opts to resort to chapter 7, it means that he or she completely cease to operate the business whose future is unknown. Reorganization of the business provides the creditors with an opportunity to apply new strategies that can allow then to continue with the business. Thus, a creditor, I would prefer to reorganize the business instead of liquidating it.
Works Cited
Corbae, Dean, and Pablo D’Erasmo. "Reorganization or liquidation: Bankruptcy choice and firm dynamics." UCL Macro seminar. (2014): 1-37. Web. 27 Aug. 2016.
Ross, Anders. “22 Largest Bankruptcies in World History.” 2 Nov. 2015. Web. 27 Aug. 2016. <http://www.instantshift.com/2010/02/03/22-largest-bankruptcies-in-world-history/>.
