Bankruptcy is Not Right for Every Business
Sometimes people seeking Bankruptcy find that, after a consultation, there are other options they can pursue that better fit their goals. The same goes for Corporate Bankruptcy. Sometimes other options can be utilized to help you achieve your goals for your corporation. This is an issue that should always be discussed at a consultation with an attorney.
Who qualifies for Bankruptcy?
In order to file Corporate Bankruptcy, the business needs to be a separate and distinct entity all its own. A sole proprietorship would file Personal Bankruptcy as opposed to doing so through the business. Corporate Bankruptcy is generally done through Chapter 7s and Chapter 11s. There are certain criteria that needs to be met to qualify for Corporate Bankruptcy. This is generally something that will be decided upon in an initial consultation once the attorney has all the facts, and the financial information.
The Automatic Stay
As soon as a Bankruptcy petition is filed an automatic stay is put into effect which essentially stops all creditors from collecting upon a debt that the corporation owes them. This includes, among other things, lawsuits, credit cards, repossessions and foreclosures. How long this automatic stay continues will differ based on the individual facts of each case. However, for services you continue to receive to ensure your business can continue will need to be paid, or those services could stop, causing a detriment to the future of your business. For example, if you are running a restaurant you will still need to pay employees, and food distributors.
Chapter 7
A Chapter 7 is a liquidation. This is basically when a business is dissolving. The Court appoints a trustee to the case as soon as a Bankruptcy petition is filed. The trustee’s job is essentially to collect all the non-exempt assets of the corporation and sell them. The proceeds are used to pay any creditors of the corporation. Essentially once this is complete the business no longer exists.
If you do not want to dissolve your business, but are not able to keep up with the current economic conditions, and the creditors knocking down the door, then a Chapter 11 Bankruptcy might be best for your business.
Chapter 11
A Chapter 11 is a reorganization of the business. It’s similar to a Chapter 13 in the sense that in Chapter 11, a plan is put into place to allow you to repay your creditors over the life of the plan. However, unlike a Chapter 13, in a Chapter 11 we are working with the creditors, because the creditors generally have to approve the Chapter 11 plan of repayment. When a creditor does not approve, the plan can be altered, or occasionally the Bankruptcy Court can require the creditor to approve the plan (this is called a “cram down”).
Certain debts can still be discharged in a Chapter 11. Today many secured debts (such as loans secured by land, vehicles or inventory), are valued at less than what is owed on them. This allows the amount owed in excess of the value to be treated as an unsecured debt. Unsecured debts do have the potential to be discharged in certain circumstances. Furthermore, in dealing directly with the creditors, secured debts can be negotiated. This can lead to potentially lower interest rates, or even lower principal payments in certain circumstances.
A Chapter 11 Bankruptcy, can be a complicated process, but it can essentially save the life of your business. Every Chapter 11 case is very different, however, no matter how big, small or complicated, at Brown, Van Horn, we work close with our clients to assure all deadlines are met, and that the Chapter 11 plan works for your business to have future success.
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