Chapter 11 bankruptcy, known as “reorganization bankruptcy,” is a process aimed at preserving a debtor’s business value. It unfolds in five stages, with Part I focusing on prepetition planning and the initial filing. These stages lay the groundwork for the proceedings and influence the debtor’s ability to reorganize effectively.

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the systematic liquidation of a business debtor’s assets by a bankruptcy trustee, with the proceeds distributed to creditors. This process signifies the end of the business partner for creditors, although occasionally, the trustee may operate the business briefly to sell assets as a going concern. While Chapter 7 shares similarities with Chapter 11, such as the automatic stay and claim filing deadlines, it presents unique challenges and opportunities for creditors.

Understanding the differences between receivership and bankruptcy is crucial for businesses facing financial distress. A receivership involves the appointment of an independent third party by a court to manage and preserve a business’s assets, primarily to maximize the value of the secured lender’s collateral. In contrast, bankruptcy generally benefits the borrower who has become insolvent and is governed by the Bankruptcy Code, allowing existing management to maintain control and potentially discharge debts.

For companies in financial distress, retaining key employees during a Chapter 11 restructuring can be crucial for success. Key Employee Retention Plans (KERPs) and Key Employee Incentive Plans (KEIPs) are tools used to incentivize employees to stay and perform. KERPs are typically designed for non-insider employees and offer bonuses tied to restructuring milestones, while KEIPs target senior management with performance-based bonuses. Both plans aim to mitigate the uncertainty and disruption of working at a company in bankruptcy.

Structured dismissals have emerged as a viable alternative for Chapter 11 debtors seeking to exit bankruptcy without the high costs and complexities associated with confirming a Chapter 11 plan or converting to Chapter 7. This approach is particularly useful when a debtor’s assets have been sold, and the remaining funds are insufficient to justify a full plan process but can still provide some distribution to creditors. Unlike a straight dismissal, a structured dismissal offers a more controlled exit, ensuring that the interests of the debtor, creditors, and third parties are adequately protected.

Chapter 15 of the Bankruptcy Code provides a mechanism for debtors to have foreign insolvency proceedings recognized in the U.S. This recognition allows orders from foreign courts to be given effect in the U.S., offering key protections such as the automatic stay. In contrast, Chapter 11 focuses on domestic reorganization, allowing debtors to restructure their debts and business operations within the U.S. legal framework.

Financially distressed companies have several alternatives to Chapter 11 bankruptcy, including workouts, assignments for the benefit of creditors (ABC), and Chapter 7 liquidation. Each option has distinct processes and impacts on creditors, which are crucial for understanding how to navigate these situations effectively. In a workout, companies negotiate debt modifications directly with creditors, allowing the business to continue operating while restructuring its debt.