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Business Bankruptcy: An Overview
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Business Bankruptcy: An Overview
Declaring bankruptcy can be a difficult decision for any business owner, but it is sometimes necessary to give the business a fresh start. Business bankruptcies allow companies to reorganize their debts or liquidate assets to pay off creditors. Understanding the basics of business bankruptcy can help owners make informed choices during challenging financial times.
Types of Business Bankruptcy
There are several main types of bankruptcy filings available to businesses under Chapters 7 and 11 of the U.S. Bankruptcy Code:
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the business stops operating and a trustee liquidates its assets to pay off creditors. Any remaining debts after liquidation are discharged. Chapter 7 is typically used when the business has no prospects for continuing operations.
Chapter 11 Bankruptcy
Chapter 11 allows businesses to reorganize debts while continuing to operate. The business puts together a reorganization plan laying out how it will catch up on debts, which creditors must approve. Many large companies have used Chapter 11 to successfully turn around struggling businesses.There are several types of Chapter 11 bankruptcies:
- Prepackaged Bankruptcies: The reorganization plan is negotiated with major creditors before filing for bankruptcy. This allows faster approval of the plans.
- Traditional Reorganizations: No reorganization plan is in place at the time of filing. The company has time after filing to develop a restructuring plan.
- Liquidating Plans: While allowing reorganization, the end goal is to liquidate assets to pay off debts. This is common in retail bankruptcies.
Deciding If Bankruptcy Is Necessary
Filing for bankruptcy is a major decision that requires careful consideration of all options. Key things to consider are:
- Ability to Reorganize Debts: Can the company realistically catch up on debts based on projected cash flow? If not, bankruptcy may be necessary.
- Cost of Bankruptcy: Legal and administrative costs for a bankruptcy filing can be substantial. Is bankruptcy the most cost-effective path forward?
- Business Viability: If the business model is no longer viable, bankruptcy liquidation may be the best option to pay off creditors.
Consulting with an attorney experienced in business bankruptcies is highly recommended before deciding on bankruptcy. They can provide guidance based on the company’s specific situation.
The Bankruptcy Process
The bankruptcy process involves several standard steps:
1. File Bankruptcy Petition
To open a bankruptcy case, the business files a petition in bankruptcy court. This outlines basic information about the company, assets, debts, and the type of bankruptcy sought. Filing the petition immediately triggers an automatic stay, halting collection actions against the business.
2. Appoint Trustee/Examiner
In a Chapter 7 bankruptcy, the court appoints a trustee to oversee liquidation of assets. For Chapter 11 cases, an independent examiner may be appointed to review the company’s finances.
3. Meeting with Creditors
Within about a month after filing, debtors must attend a meeting with creditors to answer questions about the company’s financial affairs. Creditors use this to gather more information about debts owed to them.
4. Submit Reorganization Plan
For Chapter 11 bankruptcies, the company develops a reorganization plan to catch up on debts and regain profitability. This lays out repayment terms, which classes of creditors must approve.
5. Plan Confirmation/Asset Liquidation
The court confirms and makes binding reorganization plans meeting legal requirements. If the plan is not approved, the company may file an amended plan or convert to Chapter 7 liquidation.The bankruptcy court oversees the process to completion, which typically takes 6 months to 2 years depending on the complexity. Most business activities can continue as normal during bankruptcy, but the court must approve major company decisions.
Consequences of Business Bankruptcy
While allowing businesses to restructure or catch up on debts, bankruptcy also involves negative consequences:
- Company management can be replaced by an appointed trustee who makes decisions to serve creditor interests.
- Bankruptcy damages business credit ratings, making it harder to secure financing after emerging from bankruptcy.
- Company financial information becomes public record, exposing details of debts and company management decisions.
- For Chapter 7 bankruptcy, legal protection from debts only applies to the business entity itself. Company owners or management can still be personally liable for business debts.
- Taxes may still be owed on gains from liquidated assets or canceled debts. This surprises some business owners.
Understanding these bankruptcy outcomes can help businesses prepare contingency plans. Experienced legal counsel guides companies through the process to achieve the best possible outcome.
Finding Legal Support for Business Bankruptcy
The complex regulations around business bankruptcy make working with an attorney essential. Look for a business bankruptcy lawyer with extensive experience specifically with cases similar to yours. Key credentials to look for include:
- A strong track record handling major Chapter 11 cases
- Past experience as a bankruptcy trustee
- Certification from the American Board of Certification in business bankruptcy law
Ideally, the attorney should offer a free initial consultation to discuss your situation. This helps determine if bankruptcy is the right path before committing to legal fees.Check reviews on Avvo and other legal sites to choose a reputable lawyer known for personal service and successful case outcomes. Location within your state also matters since bankruptcy laws vary between jurisdictions.
Business Bankruptcy: Making the Best of a Difficult Situation
While extremely challenging for any business, bankruptcy filings can provide a path forward when debts become unmanageable. Understanding the basics around business bankruptcy assists company owners and managers in making informed decisions during times of financial distress. Identifying the best legal counsel also helps navigate the complex bankruptcy process.With careful planning and support from an experienced attorney, many companies emerge from bankruptcy healthier and better positioned for future success. The process requires difficult decisions, but the bankruptcy system ultimately intends to help businesses survive.
Resources
Videos Explaining Business Bankruptcy
Reddit Threads Discussing Bankruptcy Experiences
- r/SmallBusiness thread on business bankruptcy experiences
- AskReddit thread asking businesses about the bankruptcy process
Additional Articles on Business Bankruptcy
: https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics: https://www.lawinfo.com/resources/bankruptcy/when-should-a-business-file-a-chapter.html: https://hbr.org/2019/01/understanding-chapter-11-bankruptcy: https://www.allbusiness.com/when-to-file-business-bankruptcy-14441574-1.html
: https://www.thebalancesmb.com/what-happens-when-a-business-files-bankruptcy-393055: https://www.nolo.com/legal-encyclopedia/consequences-business-bankruptcy.html: https://www.avvo.com/business/business_bankruptcy/advice: https://www.avvo.com/