What Is Business Bankruptcy?

Individuals aren’t the only entity to struggle with finances, which is why we have business bankruptcy. Just as a person can accumulate debt, take out to many loans, and overuse a credit card – so can a company.

In fact, businesses are far more susceptible to debt and overwhelming payment obligations. Why? The implications and repercussions of borrowing and payment obligations are less immediate and removed for a company. Business owners and boards that previously crossed the threshold from healthy borrowing to bankruptcy will tell you that when you accumulate thousands upon thousands in debt at a business, you begin to feel immune to the process and consequences of your spending.

Our team at Simon Haysom, LLC will answer three important questions about business bankruptcy. If your company is struggling financially or needs further advice on business bankruptcy, be certain to contact our firm or a reputable law firm in your area.

#1: How Can a Business File for Bankruptcy?

There are four chapters of the U.S. Bankruptcy Code that can be utilized for business bankruptcy. Two of these chapters are also applicable to individual bankruptcy, and therefore far more familiar to residents and small business owners in Goshen. These well-known types of bankruptcy are Chapter 7, which is a liquidation of your assets to repay debts, and Chapter 13, which is a reorganization of your debt obligations. In the context of business bankruptcy, these chapters function similarly to an individual case.

A business can also file for bankruptcy under Chapter 11 or 12 of the U.S. Bankruptcy Code.

Chapter 11 bankruptcy is the type most commonly associated with business bankruptcy, and at times the terms can even be used incorrectly as synonyms. Chapter 11 requires the business to reorganize its debts, in a process similar but far more labor-intensive than what is required under Chapter 13. All regular expenses accrued and owed during a Chapter 11 bankruptcy are the responsibility of the business and must be paid for the business bankruptcy to be discharged.

Chapter 12 bankruptcy is the most recent type of business bankruptcy included in the U.S. Bankruptcy Code. It is only applicable to a limited number of businesses based on industry. The most notable requirement of Chapter 12 bankruptcy is that at least 50% of the company’s debt must be in farming operations or 80% of its debt in fishing operations. The purpose of Chapter 12 bankruptcy is helping independent farmers and fishers keep their operations afloat.

#2: When Does a Company File Business Bankruptcy?

Filing for individual bankruptcy is partly a judgment call. An individual may struggle with medical bills, credit card debt, and other payment obligations for months or years before deciding bankruptcy is the right route to financial freedom. For personal or professional reasons, waiting to file for bankruptcy is often a good choice for individual debtors. In many ways, the determination to file business bankruptcy is the same.

A company can make minimum payments, ignore creditors, and even default on contracts before business bankruptcy comes into view. Many companies will look to other forms of debt reorganization and negotiation with creditors before filing for bankruptcy under Chapter 7, 11, 12, or 13. However, just as there are certain eligibility requirements for filing individual bankruptcy, the same applies to companies. An entity might be forced to file under a certain chapter of the U.S. Bankruptcy Code because of the type, amount, and structure of its debt.

#3: What Happens After Business Bankruptcy?

Most companies want to remain in existence after business bankruptcy. For this reason, Chapter 11 bankruptcy is seen as the best route for struggling companies. Under Chapter 11, an entity can reorganize and restructure its debt, adhere to a repayment plan, and continue to operate during and after business bankruptcy.

However, the rate of successful Chapter 11 bankruptcies is very low. There are extensive studies into the low number of Chapter 11 reorganizations that go well and have a positive result, but a straightforward answer eludes bankruptcy lawyers and other financial experts. In part, it is understood that certain businesses are never going to succeed.

Unlike individuals, who can adopt better financial habits, look for a new job, and spend less on non-essentials, an entity needs revenue to stay in existence. Despite the dismal results, Chapter 11 bankruptcy filings are up 63% from 2017.

When an entity files for Chapter 7 bankruptcy, it is forced to finalize its books and close its doors. All assets of the business are liquidated to repay debts and the company isn’t permitted to pay or schedule regular and day-to-day obligations, making business operations impossible.

Are You Filing Business Bankruptcy?

Any type of business bankruptcy requires extensive skill and training to execute successfully. You need a strong financial advisor, dedicated accountants, and a knowledgeable business bankruptcy lawyer. Contact our team at Simon Haysom, LLC to learn more.

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