When a company faces financial problems, their options are somewhat limited compared to the options for an individual with financial trouble. For individuals, creditors are often willing to negotiate repayment terms and provide some concessions for the debtor. As a business, creditors may not be willing, or have the ability to negotiate payment terms for debts that are owed. If an individual chooses bankruptcy as an option to manage their debts, the process is far less complicated than for a business filing for bankruptcy.
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Chapter 7 Bankruptcy In Business
Filing for Chapter 7 bankruptcy is business is a liquidation process in which the business sells off all remaining assets to the company in order to satisfy debts to the creditors. Liquidating assets to pay creditors will also mean the company will no longer be able to operate and the owner(s) will be removed of any stake or rights to the company. Essentially, the company will be dissolved once the court discharges the bankruptcy case. A Chapter 7 bankruptcy is beneficial for a business when it has no future earning potential, no assets that could be recovered after the debts are eliminated or does not have the financial means to repay their debts through a debt restricting process.
Businesses operating as a Limited Liability Corporation can complicate the bankruptcy process. Because there are no steadfast rules regarding Limited Liability Corporations, how the business is dissolved becomes a choice of the bankruptcy court. A Limited Liability Corporation can possess a single owner, dual partnership or multiple partnerships. If the courts treat the business as a single owner or partnership, the business can be dissolved and the assets would be divided among the creditors. In this case, the owner would be terminated of all rights to ownership and removed of their stake in the company. If the LLC is handled like a corporation, the owner would be able to choose to relinquish ownership to remaining members or third party, while maintain stock as a shareholder. In order to liquidate assets of the company, all of the shareholders must agree to the proceedings. Furthermore, if there are any remaining assets left in the company they must be divided among the remaining members who did not relinquish their rights to the company.
Chapter 11 Bankruptcy In Business
A Chapter 11 bankruptcy is similar to Chapter 13 bankruptcy for an individual, in which debts are reorganized and a debt repayment plan is created. Businesses that file for Chapter 11 bankruptcy are allowed to remain in operation while repaying their debts. Business owners and shareholders are able to keep their rights and stake in the company as the work to repay their debts to creditors. Businesses filing for Chapter 11 bankruptcy should have the financial means necessary to repay their debts and have the potential for future earnings to stay in operation. For businesses looking to sell the business to a third party, Chapter 11 bankruptcy affords the opportunity for a buyer to purchase the assets of the business without assuming the seller's liabilities.
In a Limited Liability Corporation, a Chapter 11 bankruptcy is handled in much the same way. The difficulty lies with the number of owners in the corporation. For a single owner, the reorganization process can go relatively smoothly. For multiple owners, the courts treat the business as a corporation requiring the consent of filing from all members. As part of the repayment plan, the business may obtain a new loan to stay in operation and allow creditors priority over future earnings to repay the debts. The bankruptcy court may allow for the business' debts to be repaid through terminating one or more owner's rights to the company and handing over the company to remaining members or a third party.
Considerations
Businesses filing for bankruptcy should evaluate the types of debts owed, their current financial standing and the potential for future earnings. Not all debts are dischargeable through bankruptcy and some secured debts owed on real property cannot be protected during bankruptcy. Non-dischargeable debts run the risk of liquidation unless payments are being made to satisfy the debt. A Chapter 11 bankruptcy can provide protection of property and prevent foreclosure or repossession. Many businesses file for Chapter 11 bankruptcy and fail to satisfy the repayment plan. If the Chapter 11 repayment plan is not completed, the business runs the risk of having operations terminated and assets liquidated through a Chapter 7 bankruptcy. It is best to consult a qualified bankruptcy attorney to review options before filing for bankruptcy in business.
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