Business Bankruptcy-FAQs

Frequently Asked Questions
Q. Who can file a business bankruptcy?
A. Corporations, limited liability companies and partnerships are legal entities separate from their shareholders or partners and can file Chapter 7 or Chapter 11 bankruptcy. Debtors who operate as sole proprietors must file in their own name because the assets and the liabilities of the business are really the assets of the proprietor. A sole proprietor may file Chapter 7, Chapter 11 or Chapter 13 (if the debt limits are met).
Q. Should the business be reorganized under Chapter 11 or liquidated under Chapter 7?
A. To answer this question, you have to know what has caused the current problems the business is experiencing. Can the business continue to operate by using cash for current operations instead of old debt; benefit from rejection of leases or contracts that are no longer advantageous or prevent the loss of vital assets or cash to creditor collection actions. A liquidating Chapter 13 or Chapter 11 could provide a reasonable opportunity to sell the business as a going concern or valuable assets such as inventory or real estate. Proceeds could pay taxes or unpaid salaries; sale of the business could provide ongoing jobs for the work force under new ownership. The bankruptcy could then be converted to Chapter 7 or dismissed if bankruptcy protection is no longer needed. The Court will probably condition dismissal of the case on payment to creditors of the sale proceeds.
Q. What are the Benefits and Requirements of a Chapter 11 Bankruptcy reorganization?
A. Chapter 11 Bankruptcy reorganization requires significant time on the part of the owners and managers to comply with the requirements of the bankruptcy system, interface with counsel, and negotiation with creditors. In exchange for the protection of the automatic stay and other bankruptcy protections, the debtor provides full disclosure of its financial condition to creditors and the Court, both at the beginning of the case and on a monthly basis thereafter, and operates as a fiduciary for its creditors while the bankruptcy is ongoing. Because of the very considerable time that must be devoted to a reorganization by debtor’s counsel, the fees for representation are substantial and must be weighed against the benefits to the debtor. Chapter 7 should be considered when the continued operation of the business will not produce a positive result and and the debtor would not receive a net benefit from a liquidating Chapter 13 or Chapter 11 proceeding.
Q. Does Business Bankruptcy Provide for the Discharge of Debt?
A. Discharge of Debt Under the provisions of Chapter 7, Bankruptcy individuals can get a discharge of the dischargeable debts and a chance to start over. Corporations do not get discharges, so a corporation won’t get a fresh start in a Chapter 7, the way an individual does. Nonetheless, a Chapter 7 can provide an orderly liquidation of assets and creditors are assured that they will be paid to the extent of the assets available and the priority of their claim. Former management is assured that the assets that are available go (after the expenses of the Chapter 7) to pay taxes for which the individuals may be liable.