With the impending bankruptcy of Borders Group Inc., we thought we'd give you a quick explanation of the two types of options facing the company.
Chapter 7 Bankruptcy
Also known as "liquidation" or "straight bankruptcy." It sparks an 'everything must go' sale of the company's assets. The company may cease operations after filing Chapter 7 bankruptcy.
The company that owes the money files for Chapter 7 bankruptcy in court. The company's assets are turned over to a bankruptcy trustee who then sells the assets and tries to pay back the company's creditors. In exchange, the company that owes the money is freed from having to pay all of its bills in full (unless some wrongdoing is found).
The details of Chapter 7 rules vary from state to state.
Chapter 11 Bankruptcy
Also known as "reorganization" bankruptcy used by many corporations (like K-Mart and General Motors).
After filing for Chapter 11 bankruptcy, the company that owes money typically keeps running its business and keeps its assets while going through a reorganization process overseen by the court.
A reorganization plan is put forth, and if the majority of creditors accept it, and the court accepts the plan - the company continues operating and repays its creditors under the reorganization plan.
Payment to creditors can come from the sale of assets, repayment from future profits, or from mergers or recapitalization.