# Receivership vs Bankruptcy: Key Differences and Benefits for Recovery

## What Is a Receivership?

Receivership and bankruptcy are often misunderstood mechanisms in the realm of financial recovery. While both aim to address financial distress, they serve distinct roles. Receivership allows a court-appointed neutral receiver to manage a company's assets to prevent bankruptcy, aiding creditors and distressed companies alike. In contrast, bankruptcy offers debtor protection from creditors. Understanding these key differences can guide better financial decisions when faced with distress.  

### Key Takeaways

*   Receivership allows creditors to recover funds and assists companies in restructuring to avoid bankruptcy.
*   A receiver, acting as a neutral party, oversees a company’s assets and operations to facilitate financial recovery.
*   Receivership differs from bankruptcy as it is not a legal proceeding but often occurs alongside legal disputes involving secured creditors.
*   Bankruptcy primarily protects debtors, while receivership focuses on safeguarding creditor interests.
*   The duration of a receivership varies based on its purpose, ranging from a few months to several years.

![Receivership](https://www.investopedia.com/thmb/oTtvHyMcx3A7zpVoFfZ3EaO_ykU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/receivership.asp_Final-48676849473a409698559a3027cabe7e.png)

*— Dennis Madamba / Investopedia*

## How Receivership Protects Companies and Creditors

Receivership is a process to protect a company. A period of receivership can be thought of as a protective umbrella for a troubled company. A receiver, or [trustee](https://www.investopedia.com/terms/t/trustee.asp), steps in to manage the entire company, its assets, and all financial and operating decisions during this time.

The company’s principals remain in place as material contributors while the receivership is operative but their authority is limited.

A receivership was traditionally intended to help [creditors](https://www.investopedia.com/terms/c/creditor.asp) recover amounts outstanding under a secured loan if a borrower defaulted on its loan payments. Receiverships are one of the most powerful solutions available to aid creditors.

They're also used by companies in financial distress. They can be part of a company’s restructuring process. Receivership can help a company restructure financially or operationally during financial distress. A receivership can be used when a company is headed toward bankruptcy.

Receivership isn't a legal process but is often used during legal proceedings. Either the secured creditor (lender) or a court of law appoints a receiver to act as trustee of a business. Privately appointed receivers will generally act only on behalf of the secured creditor that appointed them. Court-appointed receivers act on behalf of all creditors.

The receiver must be an independent party with no prior business relationship to either the borrower or the lender. They can never act for the benefit of one party and to the detriment of another.

> **Important**
>
> Receivership and bankruptcy aren't the same but neither are they mutually exclusive. They can occur at the same time or a receivership can occur without a company declaring bankruptcy.

## Essential Responsibilities of a Receiver in Managing a Receivership

The receiver has decision-making power over the company's assets and management during restructuring. This includes the authority to stop paying [dividends](https://www.investopedia.com/terms/d/dividend.asp) or applicable [interest](https://www.investopedia.com/terms/i/interest.asp) payments. The receiver has decision-making power over the company's assets and management during restructuring.

The receiver customarily works with the company to help avoid bankruptcy. A receiver may choose to shed select assets to pay some creditors and to bring the company into a period of recovery.

The court may order that a company’s assets be [liquidated](https://www.investopedia.com/terms/l/liquidation.asp) if these efforts fail to achieve the purpose of the receivership or be seen as insufficient from the start. A liquidator would oversee the sale of assets and collect the funds to repay creditors in this case. The company would cease to exist when the assets are all sold.

## Differences Between Bankruptcy and Receivership Explained

Confusion over the terms “bankruptcy” and “receivership” is quite common but the fundamental differences are fairly straightforward.

### Bankruptcy

Bankruptcy is an action that’s usually taken to protect a [debtor](https://www.investopedia.com/terms/d/debtor.asp) from collection actions by creditors. Bankruptcy courts focus on protecting the borrower, not the lender.

A company might file for [Chapter 11](https://www.investopedia.com/terms/c/chapter11.asp) bankruptcy when it wants time to solve its financial problems while maintaining business operations. Chapter 7 bankruptcy is typically used to liquidate and close a business.

> **Fast Fact**
>
> There are other forms of bankruptcies but these two are the most common.

### Receivership

Unlike bankruptcy, a receivership isn't a legal action but rather an adjunct solution. For a secured lender, receivership protects the borrower's assets until the court resolves the creditor's claim.

The lender asks the court to protect its collateral, such as land, buildings, income, or cash. An independent party manages and controls assets until the court discharges them.  

## What Are Some Benefits of a Receivership?

There can be benefits for creditors as well as for a company. Creditors can be sure that the assets that secure the loans they made to a company remain protected and of value until their claims are handled. A business can get a neutral, objective professional to oversee problems that may concern management, operations, or financials. The receiver can help position the company to thrive when the term of receivership ends.

## Who Requests a Receivership?

A secured creditor can request a receivership as a way to obtain funds or protect a borrower’s assets until a court resolves the creditor’s claim against the borrower.

## How Long Does a Receivership Last?

Receiverships can last anywhere from a few months to several years. It depends on the reason why they're implemented. A receivership put into place to help resolve the claim of one creditor could last less time than one that's used to remedy a company’s ills so the company can avoid bankruptcy.

## The Bottom Line

Receivership and bankruptcy serve distinct roles in financial recovery, providing valuable mechanisms for creditors and distressed companies. Receivership offers a structured approach for creditors to recover funds, often without resorting to bankruptcy, by appointing a neutral receiver to manage the company’s assets and operations. Unlike bankruptcy, which primarily protects debtors, receivership focuses on satisfying creditor claims while potentially guiding the company back to financial health. By understanding these processes, creditors and companies can make informed decisions that align with their financial recovery goals

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. “[Investor Bulletin: 10 Things to Know About Receivers](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_receivers.html).”
>     
> 2.  United States Courts. “[Chapter 11—Bankruptcy Basics](https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics).”
>     
> 3.  United States Courts. “[Chapter 7—Bankruptcy Basics](https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics).”