When a business finds itself buried in debt it often faces angry creditors, worried owners, doubting customers, and a damaged brand. Combined, these make life tough. The business does have options though. Bankruptcy laws provide assistance to a business which is struggling to pay its debts, as filing for bankruptcy puts an automatic stop to creditors pursuing their claims outside of the bankruptcy court. The business can try to remain in operation by reorganizing itself through the bankruptcy protection afforded by Chapter 11, or it may choose to liquidate by filing for bankruptcy under Chapter 7. In either event, the Bankruptcy Code is complicated and requires counsel with a thorough understanding of its provisions and frequent amendments.
Choosing whether to file for bankruptcy, and under which Chapter, can be a difficult decision that requires a thoughtful discussion and consideration of a number of factors with experienced counsel.
Personal liability for corporate debts results in another layer of complexity. Often, the bankruptcy is filed by someone other than the business, since the business can close down and stop operating. A person obviously can’t do that.
If a business is struggling, but has the potential to be profitable, it may opt for a Chapter 11 corporate bankruptcy filing, allowing it to design a plan to restructure and pay its debts. Typically, the business may continue to operate during this process. The business will be required to file their financial statements and a reorganization plan with the court. Reorganization plans may include renegotiating their business debts or downsizing their current operations. A committee of its creditors will then vote to approve or disapprove the business’ reorganization plan, and the Bankruptcy Court will hold a hearing. If approved, the business must discharge its debts in accordance with the approved plan while carrying on with its business. Once the plan is carried out to completion, the business will be free of debt.
If the business feels that it can no longer continue to operate because its profitability and debt repayment capacity have been completely eroded, it may opt for a Chapter 7 business liquidation filing under the Bankruptcy Code. Unlike in a Chapter 11 bankruptcy where a business may continue operating, in a Chapter 7 proceeding the business is turned over to a trustee who sells the business assets and uses the sales proceeds to pay the creditors. Even if the proceeds of the business’ liquidation are insufficient to fully repay creditors, the creditors cannot seek additional payment in the future. It’s also possible that the business work with creditors and stay open, or could voluntarily liquidate, sometimes working with creditors.
Sole proprietorships are treated differently and have a different set of options to consider. The business’ assets and liabilities are tied directly to the sole proprietor. A sole proprietorship can still obtain relief through bankruptcy, with the individual owner filing under Chapters 7 or 13. If an individual satisfies the requirements for bankruptcy under Chapter 7, they can discharge their debts. If they do not meet these requirements, they may still obtain relief from creditor harassment by filing for bankruptcy under Chapter 13, which allows them to obtain a repayment plan and pay off their debts over an extended period.
A corporate bankruptcy filing should be considered as the last resort. The process is complex and should not be undertaken without consulting an attorney. Dworken & Bernstein can help you and your company understand your legal position, determinate your alternatives, and guide you in successfully working through the bankruptcy process.