Should Your Business Seek Bankruptcy Protection?
Businesses, meaning corporations or partnerships, have two options in filing for bankruptcy: Chapter 7 and Chapter 11. (Individual self-employment businesses can also potentially file under Chapter 13) Both have their advantages and disadvantages.
Chapter 11
Chapter 11 is designed for businesses that seek to remain operating and wish to “reorganize” their debts. Depending on how the corporation is structured, how the debts are allocated, the value of all assets–both tangible and intangible–a plan can be proposed that repays anywhere from zero to 100% to unsecured creditors.
Chapter 11 also provides the ability to break leases and contracts, and enter into new ones more favorable to the business. This can be particularly helpful if the lease for the premises on which the business operates is burdensome and causing profits to suffer.
Chapter 11 is, however, very involved and expensive. In order to keep expenses down (as much as possible) and promote successful reorganization, it is important to seek professional counsel as early as possible to allow sufficient time for pre-filing planning and structuring.
Chapter 7
When a business has failed and there is no alternative but to shut the doors, Chapter 7 can be beneficial, although it is rarely, if ever, actually necessary. The main benefit of filing a Chapter 7 for a corporation or partnership is to relieve the officers/partners of obligations and liabilities for liquidating assets, disbursing them appropriately to creditors, and to potentially relieve them of potential other adverse consequences. What happens in a Chapter 7 case is a Trustee is appointed that takes control of the assets and sells them on behalf of the bankruptcy estate, and distributes them to creditors according to their statutory priority. (Contrast this with Chapter 11 in which the debtor corporation/partnership acts as its own trustee, or “debtor-in-possession”.) The Trustee will also investigate possible recoverable transfers to insiders, so any payments to officers or other insiders that are not part of standard salary may be problematic.
It is important to note, however, that the debts of the corporation do not get discharged in a Chapter 7 case. Click here for more information on Chapter 7 cases for businesses.
In any event, as with Chapter 11, it is important to consult with a qualified bankruptcy attorney to assess your options and advise you on the best alternatives for your situation.
