Difference Between Receivership & Bankruptcy

by Tom Streissguth; Updated September 26, 2017

In receivership, a troubled business is placed in the hands of an appointed supervisor--the receiver--who's responsible for handling financial matters. Receivership is a common feature of Chapter 11 business bankruptcies, which allow companies to request a court's protection from creditors and to restructure or eliminate their debts. Other forms of bankruptcy, including Chapter 7 and Chapter 13 personal bankruptcy, involve the work of a court-appointed trustee. A receiver is more directly involved in the management of assets than a bankruptcy trustee. Receivership may also occur when a public agency, such as a financial oversight department, decides through a court-ordered mandate that a company or bank requires hands-on supervision.

Court Appointments

Some Chapter 11 bankruptcies allow a company to continue operations while going through a financial reorganization. The company continues to provide goods or services, pay employees, and service client and vendor accounts. In the meantime, the bankruptcy court appoints a receiver to audit the books, handle the selling of assets, and repay creditors a portion, or all, of their claims. The receiver is typically an attorney or specialist from outside the court system. The goal is an orderly transition out of bankruptcy for the company, which emerges smaller but financially sound.

Receivership

An agency of the state, such as an insurance commissioner's office, can also place a company in receivership. In this case, when an insurance company, for instance, is no longer able to pay its debts or claims, the receiver steps in with an order of rehabilitation from a court. The order provides for reorganization or liquidation of the company. The receiver manages the the available assets to protect creditors and policyholders. The receiver may use money from a public emergency fund for this purpose. Under the receiver's direction, the insolvent company can be forced to merge or sell itself to another, financially sound insurance business. A public receiver may also step in to protect depositors or investors when a financial institution, such as a bank, fails. Bank customers may continue to withdraw or deposit funds, apply for loans, and carry out other business while the branches stay open and, in most cases, the parent company prepares to merge with a larger bank.

Business Bankruptcies

Receivership is not a feature of all business bankruptcies. The owner of a sole proprietorship, for example, may declare chapter 7 or chapter 13 bankruptcy, and either wind up the business or pay off (or have the court discharge) debts and allow the business to continue. Receivers take part in chapter 11 reorganization bankruptcies, where managing assets and liabilities of an insolvent business is beyond the scope of the bankruptcy court. Although the receiver may recommend liquidation of the company or a dismissal of the bankruptcy, the court remains the final arbiter in the outcome of the case.

About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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