Business Bankruptcy: Chapters 7 and 11 - Jack G Lezman, PLLC

Business Bankruptcy: Chapters 7 and 11



When a company is going out of business, they sometimes have creditors that still have to be paid for their business loans. In those situations, the business might want to consider filing a Chapter 7 Business Bankruptcy.

The majority of businesses are incorporated in some capacity, whether as a corporation or LLC. As the company is its own entity, it must file its own bankruptcy. These companies are formed for the purposes of shielding the individual from having their personal assets seized if they fail to pay their business debt. However, the business might not be able to wrap up without paying off the creditors to the best of its abilities. In those situations, the business will file Chapter 7. 

Chapter 7 Liquidation

Unlike individuals, businesses do not receive discharges when they file bankruptcy. Instead, Chapter 7 is designed to assist the business in liquidating their assets and paying off any debts they owe to existing creditors so their business can properly close. In a business bankruptcy, all remaining assets of the business are sold off to pay the remaining debts. That is a big difference from when an individual files Chapter 7 as the individual has exemptions they can use to shield their assets from creditors. 

Businesses are not offered exemptions as the court requires all assets of the business to be sold off before the business can properly close. However, it is important to remember that any debts owed personally by the individual are still owed by them after filing a business bankruptcy. Personal debts are not shielded by the owner’s company, as they entered into the debt individually and not through the business. In those situations, the individual may want to consider filing a personal Chapter 7 bankruptcy.

A business chooses to file bankruptcy so they can close out their entity in a mannerly fashion without having to worry about creditors coming back in the future. The bankruptcy’s biggest benefit is that allows the business to be closed in a calm and orderly manner. Upon filing the bankruptcy, the court appoints a trustee, whose job it is to sell off the assets of the business and disperse the funds from the sale to the creditors of the business. This process makes it much easier for the owners of the business than if they had to settle these debts with the creditors on their own.

It is very important to understand that if a business files a Chapter 7, then that business must close down. Upon completing the bankruptcy, the business will no longer be able to be operated or negotiate with other companies. In fact, while the bankruptcy will close your business in a much easier manner, you will probably collect less than if you sell the business on your own. However, with Chapter 7 the business will close in a much timelier and easier fashion. 

The largest benefit of business bankruptcy is that upon liquidation, the business will no longer be liable for any of its debts. This remains true even if the creditors are not paid in full for the debts that they were owed. All obligations of the business will have been paid to the fullest extent possible by the trustee and the business will no longer be liable for the debt. 

Most businesses will need to hire an attorney for their bankruptcy. Unlike Chapter 7 for individual debtors, the business bankruptcy may be much more expensive with regards to attorney fees. However, paying the fees for an attorney will probably outweigh the stress and demand closing a business out on your own. 

There are some types of businesses, like partnerships, for example, that won’t be helped by filing a business bankruptcy. Other businesses that only have one owner might benefit from simply filing personal bankruptcy and allowing the trustee to take over the business and dissolve it for the individual. However, there are numerous businesses that will benefit from filing a Chapter 7 Business Bankruptcy. All business owners contemplating bankruptcy should consult with an attorney prior to making a decision on how to proceed. 

Chapter 11 Restructuring

While Chapter 7 can help businesses looking to close, it does not help businesses who are having debt issues and want to stay open. In those situations, Chapter 11 will be their best option. Many large businesses choose to file Chapter 11, but small businesses are able to file it as well. 

Chapter 11 bankruptcy allows the business to stay open and restructure its debt. During that restructuring period, the business will be under the supervision of the United States Trustee’s Office (as an agent of the bankruptcy court) and the business is operated for the benefit of the creditors. While the debtor is still operating the business, they are required to operate their business in a manner that is beneficial to the creditors owed money. If they operate in opposition to the benefit of the creditors, the court will appoint a trustee to take over the operation of the business. In addition, the business must not operate outside of its normal scope and is not allowed to make any major changes or sales without the approval of the court.

 A big benefit to filing a Chapter 11 is that unlike Chapter 13, there is no debt limit. This opens the door for many businesses who would be unable to reorganize their debt in Chapter 13 due to the number of debts they have accrued. In addition, businesses with only one creditor can file as well in an attempt to save their business. In these situations, getting a plan confirmed should be easier as the debtor only has one creditor to please.

For the remainder of businesses that have multiple creditors, a committee is appointed by the trustee and represents the majority of the unsecured creditors. This committee negotiates the best possible payment plan for the creditors. Bigger cases might have multiple committees, as complex issues can arise in Chapter 11. 

The complexity of the payment plan depends on the specifics of the business filing Chapter 11. Most small businesses should have fairly easy plans to offer, while larger businesses can have much more complex plans that have many moving parts. The plan could include layoffs, stock offers, renegotiating union contracts, or closing certain business locations. 

Upon submitting the plan, it then goes up for a vote. Assuming the plan is confirmed by the court, the business is then required to make the payments outlined in the plan for the life of the bankruptcy and have to be careful not to miss a payment. If the debtor does not follow through with the plan, the case can be converted to a Chapter 7 and the assets of the business, which are normally protected, will be auctioned off to pay off the creditors. If that occurs, the business will be shut down by the court. 

Chapter 11 can be complex and is risky if not done correctly. It can be a death sentence for some debtors, while a saving grace for others. Chapter 11 should not be attempted without an experienced attorney and a good plan for repayment. If you’re interested in filing for bankruptcy, then contact the legal team at the Law Office of Jack G. Lezman, PLLC today.

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