Businesses and Bankruptcy Relief

Your business is in trouble: how do you determine if bankruptcy is necessary or helpful for your situation?

First, is the business a corporation, a partnership, or a proprietorship?

Corporations, limited liability companies and partnerships are legal entities separate from their shareholders, members or partners.  They can file Chapter 7 or Chapter 11  bankruptcy in their own right. Proprietorships are groups of individuals:  they can't file bankruptcy alone, the owners must file bankruptcy, since the assets and the liabilities of the business are really just one form of assets of the owners.  The individual owner may file any chapter that any other individual may file, as long as all criteria are met.

 

 Second, Should the business be reorganized or liquidated?

You have to know what has caused the problems the business now faces and what are the prospects for change to be able to adequately answer this question:
Reorganization does not automatically create a proper business model.  A reorganized buggy whip company will still suffer from shrinking market.  
Reorganization could free up cash from servicing the old debt to permit current operations; allow rejection of leases or contracts that are no longer in the business’s best interest; or prevent the loss of vital assets or cash to creditor collection actions.
In between Chapter 7 liquidation and reorganization, a  liquidating Chapter 13 or Chapter 11 could provide time to sell the business  as a going concern or its assets for fair market value.   The resulting 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. 

 

Third, does management have the resources and desire to engage in the reorganization process?

Bankruptcy reorganization in Chapter 11 requires significant time and money when both are already in short supply.  Reorganization can drain an already stressed organization of management's time to participate in bankruptcy proceedings and money since the legal expenses are significant.  
Most reorganizations fail, usually for lack of a real plan to solve the problems.

 

Fourth, is the business one that the owners could start up again after a liquidation of the current business?

Businesses that require little capital, have few assets, or are really just extensions of the owner's skills and personality are ones that it may not pay to reorganize.  The owners may be better off liquidating the business, in or out of bankruptcy, and starting over.

  
When Chapter 7 is best

A Chapter 7, whether for the individual or a corporation, may be the best choice when 
the business has no future, it has no substantial assets or qualities that cannot be reproduced after bankruptcy,  or the debts are so overwhelming that restructuring them is not feasible. Individuals can get a discharge of the dischargeable debts and a chance to start over.  Corporations cannot receive discharges, so a corporation won't get a fresh start in a Chapter 7, the way an individual does.  A Chapter 7 can provide a winding down under the direction of the trustee and at no expense to the shareholders.  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 are used to pay taxes for which the individuals may be liable, after the costs of administering the estate are paid.