Bankruptcy is a court process that allows an individual or business to get relief from their debts. The ultimate goal of bankruptcy is to give the individual or business a fresh start while being fair to creditors.
A business can file for bankruptcy in one of two ways: Chapter 7 or Chapter 11. Once bankruptcy proceedings are started, creditors cannot attempt to collect debt from the business until the bankruptcy process has ended.
CHAPTER 7 BANKRUPTCY
Chapter 7 Bankruptcy involves the selling off (or "liquidation") of a business' property to pay off debts. The bankruptcy process starts when the business files a petition with the bankruptcy court. The petition must list all of the business' property, debts, and recent financial history.
The court will then appoint a trustee who will sell off some of the business' property to help pay the business' debts. Some debts will be discharged by the trustee, meaning that the debts will not have to be paid. Other debts are not dischargeable including recent taxes, debts in prior bankruptcy, and penalties payable to the government.
After all the debts have been settled, the business will most likely cease to exist.
CHAPTER 11 BANKRUPTCY
Chapter 11 bankruptcy allows a business to reorganize its finances, eventually pay off its debts & continue operating once bankruptcy is complete. This process starts when the business files a petition with the bankruptcy court. The business is then given 120 days to come up with a plan to reorganize the business in a profitable way.
To make the business profitable again, the plan might involve cutting off certain unprofitable parts of the business, such as discontinuing an advertising or research department. The plan must also detail how the business will pay off its creditors in the future. The plan must be approved by the creditors before a business can get out of a chapter 11 bankruptcy.
Each type of bankruptcy has its own advantages and disadvantages:
Chapter 7
- Quicker & simpler than Chapter 11
- Only one court visit to file the petition
- Some property must be sold
- Requires a court-appointed trustee to manage the bankruptcy
- Business is unlikely to continue operation after bankruptcy
Chapter 11
- Business likely to continue operating after bankruptcy
- Property does not need to be sold
- No trustee is necessary, as the business continues to operate
- Longer & more complex than Chapter 7
- Debts must eventually be paid
Filing for business bankruptcy can be very complicated and frustrating. Getting a lawyer to help your business through bankruptcy can make the process easier, as an attorney would have prior experience dealing with bankruptcies and is familiar with your state's laws and regulations concerning bankruptcy.
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