FAQ's Regarding Business Bankruptcy
Are you a small business owner being strangled by mounting debts and limited cash flow? Are you no longer able to repay debts, including priority, secured and other types of debts? Have you come to a point that you are using the money from withheld taxes for business? If so, here are some business bankruptcy FAQ's that can help you understand what’s involved:
1. What are the various kinds of business bankruptcies?
Chapter 7 or Chapter 11 bankruptcy can be filed for by sole proprietorships, partnerships, LLCs and corporations. Chapter 7 is liquidation and it involves selling the business’s non-exempt assets and repaying creditors with the proceeds. The business ceases to exist after the bankruptcy process is complete. Chapter 11 is business reorganization. It allows businesses more time to be able to repay debts. Businesses that have come to realize that there is no longer any point to continue business operations could file for Chapter 7, while those that are still feasible could file for a Chapter 11 business bankruptcy.
2. What are the issues of a business bankruptcy filing?
Sole proprietors must file for a bankruptcy under their own name given that a sole proprietorship type of business is considered as an extension of the owner of a business. In a Chapter 7 bankruptcy relating to a partnership firm, the partners face the risk of being sued by the case trustee if it so happens that the business assets are not sufficient to repay the debts.
3. Chapter 7 or Chapter 11 business bankruptcy - which one must a business choose?
The business owner should be aware that by reorganizing his business by seeking protection under Chapter 11, he cannot expect more desirable market conditions. A business owner should only opt for Chapter 11, if his business could generate future profits based on the business’ strengths at present. A Chapter 11 business bankruptcy would help owners free up a bit of cash, which could be used to run business operations on a day-to-day basis. It will also help the business owner to reject expensive leases and to prevent business assets from being taken over by creditors.
4. What transpires when a Chapter 11 bankruptcy process fails?
A Chapter 11 bankruptcy that fails would be converted by the court to a Chapter 22 bankruptcy, which is like that of a Chapter 7. In this type of bankruptcy, business assets will be sold, and after a Chapter 22 bankruptcy process is complete, the business would not exist anymore.
5. What should the business owners take note of?
Before considering a Chapter 11 bankruptcy, priority debts of business have to be calculated first. If priority debts could not be paid, then he couldn’t be aided by a Chapter 11 business bankruptcy. He should also check how much his secured debts are. Secured creditors don’t decrease a business owner’s debts because the former could always take possession of the assets of the business. Business owners have to put together a list of his creditors and determine their classification and their priority, before he finally decides on a particular business bankruptcy category.
Business owners have to focus on these critical factors before they seek protection under either a Chapter 7 or a Chapter 11 business bankruptcy.
Smaller sized businesses rarely give consideration to bankruptcy except when serious financial pressures exist. If your company has fallen behind with lenders and you're considering