Most people have certainly heard of businesses declaring bankruptcy, but many are unclear on exactly what debt relief options are available to business organizations.
If you are considering bankruptcy for your business, you should consider whether the company’s position is so dire that it cannot recover, even if some debts were lessened or eliminated. Or, could your company reorganize, shed debt and then be able to continue operating?
This depends in part on what kinds of debt obligations you have, along with the debt-to-asset ratio of your business. If you are unsure, an experienced bankruptcy attorney can help you weigh the advantages and disadvantages of each type of bankruptcy.
Any bankruptcy stops collections activity
Filing any chapter of bankruptcy means that an “automatic stay” goes into effect. This is a court order that prohibits your creditors from undertaking any collection activities for the duration of the bankruptcy. That gives your organization breathing room, allowing you to wind down efficiently or operate your business without your debt burden.
You should not attempt to pay off any debts once you have filed the bankruptcy. This could be construed as favoring some creditors over others instead of following the priorities of the Bankruptcy Code. Any transactions you make could later be reversed by the court.
Chapter 7 eliminates debt and closes down your company
Chapter 7 bankruptcy is intended for organizations that cannot meet their debt obligations and wish to close down. A trustee will be appointed to your case. The trustee will identify all your company’s assets and debts, along with any for which you may be personally liable.
Then, the trustee will sell off any assets and distribute the proceeds to your creditors using a preference-based system. For example, secured creditors — those who required collateral — generally have the right to that collateral. Unsecured creditors are lower priority than secured creditors.
A Chapter 7 bankruptcy will remain open until the proceeds from the company’s assets are distributed and any objections to the discharge of the company’s debts have been addressed. A company with no assets could see a discharge (elimination of any remaining debt) in three or four months.
Chapter 11 allows you to reorganize and shed some debts
In a Chapter 11 bankruptcy, you are considered a “debtor in possession,” which means you continue to have the right to operate the business and retain its property as you work out a satisfactory repayment plan.
Working with the trustee, you will create a reorganization plan in which you lay out how you will pay off all or most of your creditors. This plan must be reasonably satisfactory to all, as each class of creditors must accept it, along with any particularly large creditors. However, it is ultimately up to the bankruptcy court to determine whether the plan is “fair and equitable.”
Your reorganization plan could involve extending the time to repay your creditors, reducing penalties and interest, and even eliminating certain debts. Once the court approves your plan, any debts the court was made aware of that are not included in the plan are discharged.
Chapter 13 also offers a reasonable repayment plan
Chapter 13 is not available to all businesses; you should discuss your situation with a bankruptcy attorney. This chapter offers a similar structure to Chapter 11, except that things move faster and there is no requirement that creditors agree to the plan. However, the plan must devote all of the company’s disposable income to paying off creditors over three to five years. Any remaining debt is discharged after successful completion of the repayment plan.