Strategically Managing Chapter 7 or Chapter 11 Bankruptcy

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Financial strategy is not solely about leading companies through growth and periods of success. Experienced professionals should be ready to take leadership roles in difficult circumstances and minimize the damage organizations suffer during trying times. Therefore, financial officers with comprehensive knowledge should understand the types of bankruptcy filings, when each kind is applicable, and how to guide an organization through the bankruptcy process.

Chapter 11 bankruptcy filings involve reorganizing debt and negotiating with creditors, pursuing the eventual end goal of making the business profitable again. Chapter 7 bankruptcy entails liquidating assets to pay off creditors and marks the end of a company.

A professional who has a graduate-level education in finance will understand the pros and cons of filing bankruptcy in either of these two models, and can deliver valuable leadership and advice for organizations facing debt. The following are a few of the decisions these experts will have to make when assessing a potential bankruptcy situation.

Assessing companies’ prospects

Before determining whether to start Chapter 11 or Chapter 7 proceedings, financial departments need to assess whether the organization can avoid bankruptcy altogether. If the business’s debt has become so untenable, and the possibility of profit is so remote, that the only way to pay off creditors is to sell whatever assets remain, that means Chapter 7 protection is required. The Houston Chronicle noted that Chapter 7 is primarily used when no new investor or purchaser can step in to support the company.

When circumstances haven’t reached this level, however, choosing when and if to file for Chapter 11 bankruptcy is a pivotal decision. There are more positive potential outcomes for organizations seeking Chapter 11 protection, but also a number of restrictions to contend with.

Pros and cons of bankruptcy Chapter 11

When a company finds itself unable to pay its creditors back, that organization can use a Chapter 11 bankruptcy filing as a way to emerge with its debt restructured and some of its repayment obligations discharged. Organizations that enter Chapter 11 typically remain open for business throughout the proceedings, with leaders remaining in charge. This is the main advantage of bankruptcy protection: Businesses can prevent their creditors from closing them down while making moves toward sustainable profitability.

Despite the advantages of Chapter 11, companies shouldn’t make the decision to enter bankruptcy lightly. Investopedia offered a reminder that the bankruptcy process is long and expensive, and it comes with plenty or restrictions. For instance, courts hold the final say over business decisions such as selling assets, modifying rental contracts, expanding the company, or terminating the company. Businesses that file for Chapter 11 protection are also unable to apply for loans that will begin after the bankruptcy procedures.

Pros and cons of bankruptcy Chapter 7

Chapter 7 bankruptcy is a more final process than Chapter 11. When a company enters this kind of protection, it is no longer a functioning entity. In most of these filings, the business’s assets are liquidated. The main upside is that once the process is over, creditors will have no further claim on a company or its assets. Everything that had value is sold, and the business’s funders are free from further entanglements or collections.

To get to such a point of resolution, the company goes through a liquidation sale and an auction for its property and holdings. A third-party trustee appointed by the court oversees the whole process, and the original leadership of the organization is forced to step aside. Creditors recoup what they can from the sale value of the merchandise, property, and fixtures.

Financial professionals’ role in bankruptcy

Giving advice within a beleaguered company’s financial department is a demanding process. Determining whether a bankruptcy filing is the right way to resolve a debt repayment crisis requires careful consideration of all available data. Success could enable the organization to keep operating, revitalized and newly profitable. Even in cases when there is no choice but to file for Chapter 7 bankruptcy and liquidate the business’s assets, expert financial personnel will be needed to make sure the organization meets all its legal requirements.

Financial departments are tasked with many important duties in the months leading up to a potential bankruptcy filing. By projecting their organization’s future directions, setting budgets, making investment decisions, and navigating merger and acquisition options, professionals can expend their efforts to limit debt and avoid situations in which bankruptcy is inevitable. While Chapter 11 doesn’t have the finality of Chapter 7 protection, organizations performing optimally will generally be able to avoid either kind of scenario.

Online MSF coursework

Professionals interested in deepening their knowledge and expertise about the everyday tasks of the finance department can gain new perspectives and experience by studying for a master’s degree in finance online. There are opportunities to delve into each duty and decision facing financial professionals in Online MSF programs. This extends from data-based decision-making and long-term strategy to the more specific details, such as optimal ways to face bankruptcy proceedings and other types of corporate turnaround activities. Such expertise with the less-celebrated aspects of corporate finance may increase these employees’ value.

The D’Amore-McKim School of Business’s online master’s in finance curriculum includes Business Turnarounds, a course devoted exclusively to strategies that can assist companies suffering from financial problems like mounting debts. Students use case studies to determine ideal answers to the multitude of questions that face beleaguered businesses. From legal obligations to the ethics of dealing with employees and creditors, the course provides insights into the many sides of bankruptcy, liquidation, and turnaround activities. As a final project, students evaluate an example of a troubled organization and develop a functional turnaround plan.

Hiring managers will appreciate financial job candidates who have a detailed understanding of the way complex business processes work. Students studying for an Online MSF receive insights on relevant business topics from professionals who are experts in their respective fields and active participants in the corporate world. While no organization wants to encounter bankruptcy, being ready for such a situation when it occurs may ensure the company’s survival.

To learn more about Northeastern University’s Online MSF curriculum, click here.

Recommended Readings:
What can you do with a master’s degree in finance?
Understanding different types of mergers and how to handle them successfully

The Houston Chronicle – How Are Bankruptcy & Liquidation Alike?
United States Courts – Chapter 7 – Bankruptcy Basics
United States Courts – Chapter 11 – Bankruptcy Basics
Investopedia – What’s the Differences Between Chapter 7 and Chapter 11?
Investopedia – Chapter 11
Investopedia – Chapter 7
Investopedia – Bankruptcy