What Is a Receivership and Is It a Better Option Than Bankruptcy?

If you run a company that has found itself with unmanageable debt, you might be weighing your options. Your choices may include filing for bankruptcy or restructuring the company under a receivership.

Read: What To Do If You Owe Back Taxes to the IRS

Sometimes, the court will order a receivership instead of bankruptcy, without giving the business owner a choice. For many businesses, a receivership can be a better option than bankruptcy. The goal of a receivership, unlike bankruptcy, is to save a company and return it to profitability. Here’s a look at the differences between an order of receivership and the various types of bankruptcies.

What Is a Receivership?

A receivership is a court order to restructure debt, placing control of the company under a receivership. The principals of the company will stay in place and retain their titles, but likely will not play a major role, if any, in operations.

During the period of receivership, a receiver or trustee manages the company and its assets. The trustee plays the role of CEO, responsible for all financial and operational decisions.

A receivership can occur during bankruptcy, or it can be established prior to bankruptcy to try to help the company avoid bankruptcy.

What Is an Order of Receivership?

A receivership is not a legal process, but the court might order a receivership as a way for a company to manage debt. In that case, the court will appoint the receiver.

In other circumstances, a lender might appoint a receiver to try to recover unpaid debts. The receiver acts independently of both the lender and the debtor, working to pay off the debt while also acting in the best interests of the company in debt.

Types of Bankruptcy

To understand the difference between receivership and bankruptcy, it’s best to first understand the different kinds of bankruptcy filings available within the U.S. court system.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, a company’s assets are liquidated to pay down debts. Since all assets — including those required for daily operations — are sold, it often spells the end of the company.

It’s the most common type of bankruptcy, according to Super Lawyers. But a company or sole proprietor must pass the “means test” to file for Chapter 7 bankruptcy. That means if the company has any money left over to pay down debts after it meets all expenses, it cannot file Chapter 7 bankruptcy.

Businesses, individuals and sole proprietors may qualify for Chapter 7 bankruptcy.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy can occur if a company is trying to stay in business while managing debt. In a Chapter 11 filing, the business is reorganized or restructured to reduce expenses and create a payment plan with its creditors.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is similar to Chapter 11 bankruptcy, where a payment plan is put into place. It’s available only for individuals and sole proprietors.

How Is a Receivership Different From Bankruptcy?

A receivership is different from a bankruptcy in several ways:

• Receiverships are not always court-ordered.

• In a receivership, you do not control your company, its assets or debt payment plans.

• A receivership can use debt restructuring or better asset management to pay off debts, while these options are limited in bankruptcy.

• In a receivership, the company can stay in business and keep operating, which it most likely won’t during a Chapter 7 bankruptcy filing.

What Is the Difference Between Chapter 11 Bankruptcy and Receivership?

Chapter 11 bankruptcy and a receivership share some similarities but are still different. A Chapter 11 bankruptcy seeks to protect the company from actions taken by creditors. A receivership, on the other hand, seeks to help creditors receive the money owed while also keeping the company in business.

Secured assets are protected in a receivership, which is in the best interests of both the debtor and the creditor.

Advantages of a Receivership vs. Bankruptcy

Both bankruptcy and receiverships are designed to help companies get out of debt and stay in business. “What bankruptcy is known for is providing people and companies with a fresh start,” California attorney, Richard H. Golubow, said in an article on the Super Lawyers website.

However, a receivership offers some advantages over bankruptcy.

• A receivership can protect secured assets until the debt can be repaid and the company recovers financially.

• A receivership is typically less expensive than bankruptcy proceedings. It has fewer hearings, filing requirements and fees.

• It may also help to keep a company’s financial difficulties out of the public eye, since the company doesn’t need to file a report of their assets, liabilities, income and expenses with the court. Receivership pleadings with the state court are typically filed on paper, not digitally, which makes them less accessible to the general public.

Final Note

Companies in financial distress have options to pay down their debts and stay in business. An order of receivership may be a desirable alternative to bankruptcy.

FAQ

Here are the answers to some of the most frequently asked questions regarding receivership.

• Is a receivership the same as a bankruptcy?

  • No, a receivership is not the same as a bankruptcy. A bankruptcy is ordered by a court, while an order of receivership may come from a creditor or it can be filed by the company as a way to manage their debts and avoid bankruptcy.

• Can a bankruptcy stop a receivership?

  • A bankruptcy would halt a receivership. The terms of the court-ordered bankruptcy would override the terms of the receivership.

  • On the other hand, companies facing seemingly insurmountable debt can use a receivership to avoid bankruptcy.

This article originally appeared on GOBankingRates.com: What Is a Receivership and Is It a Better Option Than Bankruptcy?