Reorganization and liquidation options for businesses.
Business bankruptcy offers companies a federal legal process for restructuring debt, selling assets in an orderly way, or winding down operations. The most common chapters for businesses are Chapter 11 (including Subchapter V for smaller businesses) and Chapter 7.
Chapter 11 reorganization.
Chapter 11 lets a business continue operating while it negotiates a plan to restructure debt with creditors. The business — referred to as the "debtor in possession" — generally keeps control of operations subject to court oversight. Plans can renegotiate contracts and leases, restructure secured debt, and address pending lawsuits.
Chapter 11 is flexible but can be expensive and document-intensive. It's used by large public companies, mid-market businesses, and sometimes individuals with debts above Chapter 13 limits.
Subchapter V for small businesses.
Subchapter V of Chapter 11 is a streamlined process for smaller businesses with debt under a statutory cap (the cap has changed over time and may continue to change). It moves faster, costs less, and gives the debtor more control over plan confirmation than traditional Chapter 11.
Subchapter V can be a practical option for closely held businesses dealing with lawsuits, supplier disputes, lease problems, or sudden revenue drops where the business itself has long-term value worth preserving.
Chapter 7 liquidation for businesses.
A business with no realistic path to reorganization can file Chapter 7 to wind down. A trustee takes control, sells assets, and distributes proceeds to creditors according to statutory priorities. Unlike individuals, business entities do not receive a discharge — the entity simply ceases to exist after liquidation.
Owners and guarantors may still face personal exposure on debts they personally guaranteed, taxes with personal liability (such as unpaid trust-fund taxes), and claims based on personal conduct. Personal liability often drives owners to consider their own bankruptcy options separately.
How business bankruptcy intersects with lawsuits.
The automatic stay applies to lawsuits against a business debtor, halting most pending litigation. Creditors with claims must generally file proofs of claim and litigate in bankruptcy court. Pre-bankruptcy contracts can be assumed or rejected as part of the case. Some pre-bankruptcy transfers can be unwound as preferences or fraudulent transfers.
Plaintiffs whose defendant has filed bankruptcy often find their claims funneled into the bankruptcy process — sometimes paid pennies on the dollar, sometimes fully, depending on priority and assets. Defendants facing significant litigation sometimes weigh bankruptcy as one option among several, ideally with bankruptcy counsel involved early.