Business Bankruptcy
Federal bankruptcy law helps businesses deal with their debt by allowing them to either request a complete liquidation under Chapter 7 of the Bankruptcy Code or a repayment plan under Chapter 11. To take advantage of a complete liquidation under Chapter 7, the business must close its doors. The business that opts for the repayment plan under Chapter 11 may remain open. An individual who operates a business as an unincorporated sole proprietor (other than stock and commodity brokers) can also use Chapter 13 of the Bankruptcy Code to repay debts but only by filing as an individual and including the business-related debts for which he is personally liable.
Chapter 7
Bankruptcy under Chapter 7 of the Bankruptcy Code is often referred to as “liquidation bankruptcy” or a "straight bankruptcy.” Under Chapter 7, businesses must cease all operations and allow the Bankruptcy Court to liquidate all assets to pay the debts. All types of business entities may use Chapter 7.
A business debtor begins the bankruptcy process by filing a petition with its local bankruptcy court. Once the petition is filed, an “automatic stay” goes into effect and the creditors are prohibited from making any attempt to collect their debt, including attempting foreclosure and repossession. Along with the petition, or shortly thereafter, the debtor files various written “schedules” and “statements” to inform the Court of its outstanding debts, its current income and expenses, any existing contracts, any current or potential lawsuits, and any recent asset transfers. Upon receipt of the Petition, the Court appoints a Bankruptcy Trustee to handle the debtor’s case. The Trustee collects and sells the assets of the business and uses the proceeds to pay off the creditors. Once the Trustee sells all of the assets and distributes the proceeds, the Bankruptcy Court discharges the remaining debt and concludes the bankruptcy proceeding.
Chapter 11
Under Chapter 11 of the Bankruptcy Code, businesses can reorganize their debts and pay them off over time. Unlike Chapter 7, Chapter 11 allows businesses to continue to operate while repaying their debts. Businesses may be given up to six (6) years to repay their debts. Although it offers businesses the option of remaining in operation, the Chapter 11 proceeding is time consuming and expensive.
A debtor begins a Chapter 11 bankruptcy in the same manner as a Chapter 7 bankruptcy – by filing a petition with his local bankruptcy court. As in the Chapter 7 case, once the petition is filed, an “automatic stay” goes into effect and the creditors are prohibited from making any attempt to collect their debt, including attempting foreclosure and repossession. Also like the Chapter 7 case, the business debtor in the Chapter 11 case files various written “schedules” and “statements” to inform the Court of its outstanding debts, its current income and expenses, any existing contracts, any current or potential lawsuits, and any recent asset transfers. Upon receipt of the Petition, the Court appoints a Bankruptcy Trustee to handle the debtor’s case. The business debtor then proposes a reorganization plan to the Bankruptcy Trustee for approval by the Court. The proposed reorganization plan includes a proposed debt repayment schedule and may include a request to terminate burdensome contracts and leases and recover assets. The business begins to operate under the reorganization plan once the Court approves the plan. Upon successful completion of the plan, the Court will discharge the balance of the business’ debts and conclude the bankruptcy.
Chapter 13
Chapter 13 is only available to sole proprietors. Sole proprietors cannot use Chapter 13 to file bankruptcy for the business. Sole proprietors must file as individuals to take advantage of Chapter 13 but can include business debts for which they are personally liable. The Chapter 13 bankruptcy proceeds in the same manner as the Chapter 11 bankruptcy except that execution of the approved repayment plan does not require as much activity by the debtor.
If your business is overwhelmed with debt, contact us today. We can help you decide if bankruptcy is for you. The only thing you have to lose is your debt. 1-800-436-9056
