Ask any business owner in bankruptcy court whether his current circumstances are the fulfilment of his business goals, and you'll obviously hear that they are not. No business owner gets started by developing a business plan that ends in bankruptcy. Nonetheless, it happens more often than it should, destroying lives, friendships, and finances. In 2010 alone there were 1.59 million business bankruptcy filings in the United States. That's an increase of more than 8% over the year before. If you find yourself in this position it is unfortunate, but thankfully there is help available to you.
Courts and Lawyers
Bankruptcy laws in this country were established in such a way as to make the process as uncomfortable as possible for both individuals and businesses. Making it uncomfortable is seen as a means of ensuring bankruptcy is a last resort. In fact, to counteract a system that had long been viewed as being too easy for people to forfeit on their debts, the last two pieces of bankruptcy legislation to come out of Congress went to great lengths to put an end to bankruptcy abuse.
As long as an owner filing business bankruptcy is legitimate in the seriousness of his financial situation, he actually has a friend in the courts and his lawyers. They are interested in seeing that the individual suffers as little as possible while at the same time satisfying creditors. Even though they may seem to be working against you, they're not. They're trying to bring an amicable solution so that everyone involved has some measure of satisfaction.
Initiating a Business Bankruptcy Proceeding
Unlike personal bankruptcy protection, a business bankruptcy can be forced by creditors even against the will of the business owner. Creditors filing business bankruptcy are more or less saying to a court that the liabilities of the businesses are too extreme and, without court intervention, they stand very little chance of getting paid. Of course, the business owner can also initiate a filing on his own. Regardless of who initiates the process, once it begins both sides are restricted.
The business owner will be restricted in that he will be unable to dispose of any assets or assume any more long-term debt. From the creditor's perspective he will not be able to continue collection efforts on any past-due balances covered under the bankruptcy. Both creditors and business owners must then submit themselves to the court. The federal bankruptcy court determines the process that will be undertaken to complete the bankruptcy proceeding.
Two Main Options
Although there are technically six different options for filing bankruptcy, there only two that make up the lion's share of business filings in the US. They are:
- Chapter 7 - Liquidation
- Chapter 11 - Reorganization
Chapter 7 bankruptcy is simply a liquidation of all assets with the proceeds being distributed among creditors as the court sees fit. Chapter 7 can be filed for both companies and individuals; it is the most common form of bankruptcy for sole proprietors and individual filings. It is rarely used by corporations, partnerships, and LLC's where individual owners and officers are seen as separate entities from the business.
The Chapter 11 filing is more common among companies that are not sole proprietorships because it allows a business to retain its assets. This type of bankruptcy protection is more or less court approved reorganization. This reorganization involves the company submitting a complete and workable plan to pay off debt and emerge from bankruptcy. If the plan is approved by the court a company is generally allowed to continue on with business as usual - as long as they make good on their commitment to pay off creditors.
It is unfortunate that the current economic circumstances are contributing to more and more bankruptcies in the U.S. But it's also important for you to know as a business owner that the option of filing business bankruptcy should be avoided for as long as possible. There are other ways to solve your company's financial problems without going this route.