Businesses that find themselves facing financial hardships are often forced to face a bleak reality: filing for bankruptcy. This last resort measure is often avoided at every cost because many believe that it is a guaranteed end to their business. While this may be true in some cases, in many cases filing for bankruptcy can actually be a good thing for the company.
Businesses facing this type of dilemma first need to establish hat their end goals are and what type of bankruptcy they wish to file. Both types of bankruptcy have a different outcome for the business, and business owners must be aware of what each type is and what they offer before blindly filing with the Bankruptcy Court.
Liquidation Bankruptcy and Bankruptcy Protection
Liquidation bankruptcy or Chapter 7 bankruptcy requires the business to surrender all of their assets to the bankruptcy court for sale to the highest bidder to pay off their debts. While this sounds very harsh, and in a way it is it is also a way for the business owner to become free of all the debts associated with the business and begin to move on to a brighter future.
The court will take control of the business and assets and distribute the money collected from the sale according to merit to the creditors. Any remaining debts are absolved by the court and the business is considered closed.
Does this mean that the business owner can never go into business again? Absolutely not. The owner will have to deal with credit issues for a year or two just like anyone who has personally gone through bankruptcy, but they are not prevented from starting or owning another business in the future.
Bankruptcy protection, or Chapter 11 Reorganization Bankruptcy, is also available to businesses. In this type of proceeding, the business files with the court for protection from their creditors while they reorganize their finances to pay off their debts.
During this process, the court will appoint a trustee to come in and oversee the finances and the structure of the company. Some assets may be sold, some departments may need to be closed, and some product lines may need to be eliminated. The trustee will determine the extent of the changes needed to bring the company into being able to pay its debts again. In many cases, the trustee does not see any changes to the business that needs to occur, just a restructuring of payments.
Once the business and the trustee have created a repayment plan, it must be submitted to the court for approval. One approved, the business must abide by the guidelines of the agreement or they lose their protection from their creditors.
During the repayment period, creditors cannot pursue further collections, seize assets or sue the business that has bankruptcy protection. This type of filing is very good for businesses that made some unwise financial decisions but have the potential to overcome this issue with a little help.
Both forms of bankruptcy have their benefits and their drawbacks for business owners. However, either one can be used to help a business overcome financial problems that cannot be resolved in any other manner.