Chapter 7 vs Chapter 11 vs ABC for small companies

Chapter 7 ends the company: a court-appointed trustee sells its assets and pays creditors, and the company itself does not get a discharge. Chapter 11 keeps it alive: the company usually stays in control as debtor in possession and proposes a plan to restructure its debts. An assignment for the benefit of creditors (ABC) is a state-law liquidation outside bankruptcy court, where an assignee chosen by the company sells the assets. If the business has no future, the choice is usually between Chapter 7 and an ABC; if it can survive, Chapter 11 or an out-of-court workout.

Side by side

	Chapter 7	Chapter 11	ABC
Purpose	Liquidate	Reorganize (or sell as a going concern)	Liquidate
Law	Federal Bankruptcy Code	Federal Bankruptcy Code	State law
Who controls assets	Trustee appointed in the case	Usually the company, as debtor in possession	Assignee chosen by the company
Business keeps operating	Generally no	Usually yes	Usually briefly, to sell
Asset sales	By the trustee	Outside the ordinary course, with court approval	By the assignee
Discharge for the company	No	Through a confirmed plan	No
Cost and speed	Lower cost; the trustee runs it	Most expensive and slowest	Often faster and cheaper than bankruptcy; depends on state
Public court record	Yes	Yes	Varies by state

When each fits

Chapter 7 fits when the company has stopped or will stop operating, owes more than it can pay, and the owners want an orderly process with a neutral trustee. The company loses control over what is sold and for how much.

Chapter 11 fits when the business is viable but its debts are not: a lease, a loan or a judgment is sinking an otherwise working company. It is also used to sell a business as a going concern under court protection. It needs money to run, because the company keeps paying its lawyers and operating costs.

An ABC fits when the business will close, its assets are worth more if sold quickly by someone who understands them, and the state’s process is workable. Startups often use ABCs to sell IP and code to a buyer fast.

What to do before choosing

1. Gather a full list of debts (secured and unsecured), assets and contracts.
2. Keep systems and records intact. In any of the three, they may be assets.
3. Talk to a bankruptcy lawyer before you pay some creditors and not others; preference rules can claw payments back.
4. Plan employee notices; a closing may trigger WARN Act obligations.

Company records in each route

Business records (email, chat, documents, CRM history) are company property in all three routes. In Chapter 7 the trustee decides whether they are worth selling. In Chapter 11 the company can propose a sale or licence, and sales outside the ordinary course need court approval. In an ABC, the assignee handles it. Customer personal information has an extra rule in bankruptcy; see company assets and data in bankruptcy.