Which statement best contrasts a liquidating bankruptcy with a reorganization bankruptcy?

Which statement best contrasts a liquidating bankruptcy with a reorganization bankruptcy?

• A. Liquidating allows continued operation; reorganizations require immediate liquidation.
• B. A liquidating bankruptcy involves stopping business and selling assets, while a reorganization bankruptcy allows the entity to continue business and restructure debts.
• C. Both types involve selling all assets; difference is none.
• D. Reorganization stops business entirely; liquidating continues.

Answer: (B)

The key idea here is the outcome for the business in bankruptcy. A liquidation bankruptcy closes the doors of the business and uses a trustee to sell its assets to pay creditors. In contrast, a reorganization bankruptcy lets the business keep operating and works out a plan to restructure debts and obligations so the company can continue as a going concern. That’s why the statement that a liquidating bankruptcy stops the business and sells assets, while a reorganization allows the entity to continue and restructure debts, is the best description. For context, this aligns with Chapter 7 (liquidation) versus Chapter 11 (reorganization) in U.S. bankruptcy practice. While some assets may be sold under a reorganization plan, the overarching goal is to preserve the business and its value, not to liquidate everything. The other options misstate the basic outcomes: liquidation does not guarantee continued operation, and reorganizations do not require immediate liquidation; there is room for ongoing business activity. Also, reorganization does not stop the business entirely, and not all assets are necessarily sold in a reorganization.

The key idea here is the outcome for the business in bankruptcy. A liquidation bankruptcy closes the doors of the business and uses a trustee to sell its assets to pay creditors. In contrast, a reorganization bankruptcy lets the business keep operating and works out a plan to restructure debts and obligations so the company can continue as a going concern. That’s why the statement that a liquidating bankruptcy stops the business and sells assets, while a reorganization allows the entity to continue and restructure debts, is the best description.

For context, this aligns with Chapter 7 (liquidation) versus Chapter 11 (reorganization) in U.S. bankruptcy practice. While some assets may be sold under a reorganization plan, the overarching goal is to preserve the business and its value, not to liquidate everything.

The other options misstate the basic outcomes: liquidation does not guarantee continued operation, and reorganizations do not require immediate liquidation; there is room for ongoing business activity. Also, reorganization does not stop the business entirely, and not all assets are necessarily sold in a reorganization.