How To File A Bankruptcy For A Small Business

Financial distress can hit any business, regardless of its size. When a business becomes financially unviable, then bankruptcy becomes a distinct possibility.

Opening Moves

The first thing is for the business debtor to file a bankruptcy petition with the appropriate bankruptcy court. As a result of filing the bankruptcy, the court will grant a stay to the debtor. A stay essentially makes the debtor immune from most forms of debt collection during the case. (Not surprisingly, some business creditors will try to negate the stay). The subsequent post-filing process depends on the type of bankruptcy sought, with the two most common kinds bankruptcy being liquidation and re-organization.

Chapter 7 Bankruptcy: Liquidation

The first kind of bankruptcy available for any business is known as liquidation. In this kind of bankruptcy, the court will appoint a disinterested third party, a bankruptcy trustee, to identify all of the debtor’s assets, which comprises the debtor’s estate. (There are exemptions, such as a person’s home, their personal belongings and so on, that can be excluded from the debtors estate). For a business, such assets typically include inventory, office furniture, business vehicles, and real estate.

Once the debtor’s estate has been finalized, the business trustee will sell off the assets and then pay the proceeds to the debtors. If everything goes well, then the business debtor will be granted a discharge of most forms of outstanding debt. (Note, there are certain kinds are debts that cannot be discharged via bankruptcy, such as delinquent taxes). Unfortunately, in many instances, a business that files Chapter 7 bankruptcy often ceases to exist, or is a shadow of its former self.

Chapter 11 Bankruptcy: Reorganization

The second common kind of business related bankruptcy is a reorganization, which allows a business to continue operating and pay to back its debts via a reorganization plan. After filing a Chapter 11 bankruptcy action, the debtor must file a Chapter 11 plan. The plan requires the debtor to identify all sources of funding, to include accounts receivable, the cashing in of stocks or bonds, and even the sale of business property. (Though not to the extent seen in a Chapter 7 bankruptcy action). Usually, the business will pay a certain amount of money to the trustee every month, who then distributes it to the debtors.

Get Legal Advice First

For a business owner, bankruptcy is a very serious matter. Although it can ultimately provide debtors with some kind of relief, the bankruptcy process can be seem daunting. That is why having the assistance of a bankruptcy attorney is a good idea. An experienced lawyer can navigate the process with their client, help retain exempt property, work out a fair repayment plan, and otherwise allow their client keep their sense of dignity.