Chapter 11 to Chapter 7 Conversion: 6 Key Changes Explained

When a Chapter 11 case is converted to Chapter 7, several key changes occur:

Loss of Control

The debtor loses control over the business assets. In Chapter 11, the debtor typically remains in possession and control of the business, but in Chapter 7, a trustee is appointed to take control of the remaining business assets. 136

Liquidation

The trustee liquidates the debtor's assets and distributes the proceeds to creditors in accordance with the Bankruptcy Code. This means the business ceases operations and its assets are sold to pay off creditors. 136

Conversion Reasons

The conversion can be voluntary, initiated by the debtor, or involuntary, initiated by a creditor "for cause." Causes include the debtor's inability to formulate a reasonable reorganization plan, continuing operational losses, failure to comply with court requirements, or lack of good faith in the reorganization effort. 123

Legal Process

The court must find that conversion is in the best interest of creditors. If the criteria for conversion are met, the court will grant the motion and appoint a trustee. 126

Impact on Creditors

Conversion to Chapter 7 can allow creditors to realize on their collateral more quickly than they would have in a Chapter 11 case. This can be particularly beneficial for lenders who have been frustrated by prolonged Chapter 11 proceedings. 6

Fees and Costs

Before a Chapter 11 case is converted, all pending court costs and U.S. trustee fees must be paid. A fee may also be required for the conversion process. 8