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Company Chooses Chapter 7 Over Chapter 11

Posted on November 10th, 2014

News of another financially distressed business filing for reorganization through a Chapter 11 bankruptcy has become so commonplace that people forget that another option for a business confronted by insurmountable financial challenges is Chapter 7 liquidation. For companies with little hope of structuring a plan to continue operations and emerge from bankruptcy as a functioning business, Chapter 7 for businesses offers a viable alternative.??

Claiming assets of $50,000 and overwhelming debt in excess of a million dollars, Arizona real estate management company Rathbun Realty filed for Chapter 7 business bankruptcy in 2012. In a Chapter 11 reorganization, the company tries to design a plan that is satisfactory to its creditors that allows it to continue in business by reducing or altering the terms of its debt. A company in Chapter 11 bankruptcy does not usually engage in asset liquidation.

Unlike the Chapter 11 where the goal is the survival of the company after it emerges from bankruptcy, the purpose of a Chapter 7 is debt relief through the elimination of the debt. Asset liquidation plays a key role in a Chapter 7 bankruptcy as the debtor sells all nonexempt property with the money going to the creditors.??

Rathbun’s financial challenges started in March of 2012 when a jury awarded a $112,000 judgment against the company. In August of that year, the owners of the company notified the Tucson Police that they suspected a former employee of taking in excess of $1 million from it. The Arizona Department of Real Estate issued an order effectively putting the company out of business. These type of events make a Chapter 7 filing a more appropriate choice than a Chapter 11 and that is why Rathbun chose to go this route.

Source: Arizona Daily Star, “Rathbun Realty files Chapter 7 bankruptcy,” Kimberly Matas, Sept. 25, 2012

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