Like a consumer, a business sometimes finds itself in the uncomfortable position of being unable to pay its debts. One solution is to file for bankruptcy, a legal process in federal bankruptcy court that releases the business from the obligation to pay all or some of its debts. Contact Key, Greer, Harrison, & Casey in Pelham, AL, to schedule a consultation with an attorney who is experienced in advising business owners about whether bankruptcy is right for them.
Bankruptcy choices for small businesses
Businesses must choose among alternative types of bankruptcies, each of which corresponds to a different chapter of the federal Bankruptcy Code. Businesses usually choose either Chapter 7 or Chapter 11, but Chapter 13 is also sometimes an option. Sometimes businesses can be involuntarily drawn into bankruptcy by their creditors, who face stiff financial penalties if they initiate an involuntary bankruptcy against a company for invalid or improper reasons.
Chapter 7 bankruptcy
Chapter 7 bankruptcies are called “liquidation bankruptcies.” Chapter 7 is usually employed by consumer debtors, but can also be used by businesses that want to liquidate their assets to be relieved of debt. A Chapter 7 bankruptcy is commenced when the business files a petition with the bankruptcy court. The court then orders an automatic stay of debt collection activities against the business and its property. A court-appointed bankruptcy trustee manages the details of the bankruptcy, selling business assets to satisfy as many of the business’s debts as possible. At the conclusion of the proceeding, remaining debts of the business are not necessarily discharged as with an individual debtor, but generally, the business ceases to exist because its assets are gone and it is no longer profitable.
Chapter 11 bankruptcy
In Chapter 11 reorganization bankruptcies, the commercial debtor is usually allowed to stay in business throughout the bankruptcy proceedings. A business debtor may only operate independently in its ordinary course; transactions outside the ordinary course of business will require approval from the bankruptcy trustee and the court.
A Chapter 11 proceeding, is also initiated by filing a petition, but a trustee is not automatically appointed. Although the bankruptcy judge may decide to appoint a trustee in a Chapter 11 case, it is the exception rather than the rule. As in Chapter 7, however, the filing of the bankruptcy petition stops creditors from attempting to collect their debts through an automatic stay.
As part of a Chapter 11 bankruptcy, the debtor business files a proposed plan of reorganization. The plan of reorganization sets forth in detail how the debtor intends to conduct its business, while still continuing to make payments to its creditors. In some situations, creditors may also propose plans of reorganization.
Chapter 11 bankruptcies divide creditors into classes, each of which has varying rights depending upon the types of debt they hold. The approval process for a reorganization plan involves negotiation and input from creditors, and the finalized plan must be approved by the court. In some cases, the court will approve the plan even though not all of the creditors did. If no plan is approved, however, the bankruptcy could be converted to a Chapter 7 liquidation or may be dismissed altogether.
The choice between Chapter 7 and Chapter 11 is not necessarily binding, as a bankruptcy case could be voluntarily converted after filing in some circumstances.
Speak to a bankruptcy lawyer
Bankruptcy may not be right for every business struggling with debt, but sometimes it is the best choice a business owner can make. Alternatives to bankruptcy include working informally with creditors toward a repayment plan or assigning assets for the benefit of creditors, and these should be considered before a bankruptcy filing. Contact Key, Greer, Harrison, & Casey in Pelham, AL, to schedule a consultation with a lawyer experienced in bankruptcy law to see if it is right for your business.
DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.