A business bankruptcy is a legal proceeding filed by a business for protection from its creditors. Two types of business bankruptcies are available -- a Chapter 11 brought to financially reorganize the business, or a Chapter 7 to liquidate the business.
A Chapter 11 bankruptcy generally allows the managers and owners to continue operating the business under the protection of the bankruptcy court without interference from creditors. The bankruptcy debtor would generally have 90 days to file a plan of reorganization for creditors to vote on. During this 90-day period the debtor would normally negotiate the plan of reorganization with its creditors. The plan of reorganization will usually provide for partial payment of unsecured debts over time. A Chapter 11 works well for a business behind in its unsecured debts, with some cash in the bank and regular cash flow and the hope of profitability or a business that can be sold.
A Chapter 7 bankruptcy is the liquidation of the debtor's business assets. Upon the filing of a Chapter 7 bankaruptcy a trustee is appointed to take charge of the debtor's business. The trustee may continue to operate the business for a short time or immediately liquidate the assets. The trustee's job includes the collection of all of the business' assets including accounts receivable and preferences, that is, payments made by the business as much as a full year (and sometimes as long as 6 years) prior to the bankruptcy filing. If the trustee is successful in collecting assets for distribution, creditors will be invited to file claims with the court. The assets, after trustee's fees and costs, will then be divided on a prorata basis between all of the creditors. A Chapter 7 bankruptcy does not technically relieve or discharge a business' debts. Instead, the business is generally dissolved after the bankruptcy leaving nothing for the creditors.
Bankruptcy can be an important tool for a financially troubled business but it is not the only tool available. Financial reorganizations can be accomplished through negotiations with creditors and through other means. If you believe your business is financially troubled, you should immediately seek competent legal advice from an experienced attorney.
If you would like more information about business bankruptcy matters, please contact us through our e-mail or by calling (612) 339-4295.