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Hostess bankruptcy: From Chapter 11 to Chapter 7?

Crowds of people are hitting grocery stores. Instead of buying preparations for Thanksgiving meals, however, they are buying Twinkies. Last week, Hostess declared that it would need to liquidate and could not continue its Chapter 13 bankruptcy plan.

Of course, that doesn't necessarily mean the end to the Twinkie. Other companies will put bids in for the highly profitable treat. It does, however, shine light on some of the options that businesses have when they face significant debt.

Businesses filing for bankruptcy have a choice to make: Should they reorganize under Chapter 11 or liquidate under Chapter 7 bankruptcy? Both bankruptcy chapters offer solutions to debt issues, but only one allows a business to continue to remain viable (Chapter 13). If a business decides to pursue Chapter 13, it can remain in possession and continue its operations, but it must work with creditors and the court to create a bankruptcy plan. In many cases, that means laying off workers and reducing pay in order to remain profitable.

For Hostess, that was the main challenge to the Chapter 11 bankruptcy. Their proposal to reduce pay led to a union strike, which, according to Hostess, precipitated the move from the Chapter 11 bankruptcy to a request for liquidation. Today, the bankruptcy judge showed his skepticism at the strike and ordered the parties to try mediation. Depending on how the mediation goes, the judge may have another opportunity to decide whether to allow Hostess to close its bakeries and distribution centers and, as requested by the U.S. bankruptcy trustee, convert the case to a Chapter 7 bankruptcy.

Hostess is a large corporation. In most small business bankruptcy cases, the business will work directly with creditors, make necessary changes and then continue down a path toward fewer debts and, in many cases, success as a business.

Yet, if a business decides to try Chapter 13 bankruptcy, it can, like Hostess, make the choice later on to liquidate assets and discharge debt.

Learn about the differences between Chapter 11 and Chapter 7 bankruptcy by visiting our pages on business bankruptcy.

Source: Bloomberg Businessweek, "Hostess asks court to approve demise while U.S. objects," Dawn McCarty, Nov. 19, 2012

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