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What Happens if Your Company Goes Bankrupt?

Jones ,  , 

Bankruptcy is a legal process initiated by an individual or a business when unable to repay debts. Here’s what to do if your company goes bankrupt.

It is a reconciliation process where debtors get a chance to recover part of their unrecovered debts and borrowers can regain their financial credibility.

Depending on the type of bankruptcy filing, a business may continue operations with a plan to repay all or part of the existing debts.

US federal courts hear bankruptcy cases and appoint a trustee to handle business transactions afterward. The court decides the petitioner’s eligibility to file for bankruptcy and approves/denies a plan.

Types of Bankruptcies

Most businesses can choose either chapter 7 or chapter 11 bankruptcy. However, small businesses can file for chapter 13 as well.

Chapter 7

It is also called straight bankruptcy. Most businesses are closed after filing for chapter 7 bankruptcy.

The federal court appoints a trustee to liquidate all assets of the business, consolidate and repay debtors in order. There is usually little left for business owners as a financial distress business does not own much anyway.

Chapter 11

This type of bankruptcy is called reorganization. The appointed trustee works with creditors and the applicant to agree upon a reorganization plan for the business.

This plan helps a business continue operations while repaying debts with new terms. However, it is a costly and lengthy process and is commonly used by large businesses.

Chapter 13

It is a similar type of bankruptcy to Chapter 11. However, it is used by individuals, sole proprietors, and self-employed only.

This type of bankruptcy also saves business owners from personal asset liens.

What Happens if Your Company Goes Bankrupt?

The outcome of a bankruptcy filing for your business depends on the type of bankruptcy filed. The choice of bankruptcy then depends on the entity structure as well as your future business plans.

Sole Proprietor

A sole proprietor can file for all three types of bankruptcies with the following outcomes.

Chapter 7:

  • Eliminates personal and business debts
  • The trustee may sell all assets and close the business
  • A bankruptcy means test is not required when business debt exceeds the personal debt

Chapter 11:

  • Offers a reorganization plan to businesses and continues operations
  • The filer can keep business and personal assets
  • It is a costly and lengthy procedure and rarely used by sole proprietors.

Chapter 13:

  • Owners can save personal property
  • Businesses can continue operations
  • It can be a costly plan if the debt repayment plan is shorter.

Partnership

If your business type is a partnership, you can file for a Chapter 7 or Chapter 11. Chapter 13 is not available for business partnerships.

Chapter 7:

  • If filed, the personal assets of partners can be liquidated.
  • It may result in a partnership dispute due to increased litigation.
  • A business is usually closed.

Chapter 11:

  • Some partnership deeds prevent Chapter 11 bankruptcies.
  • It helps a partnership continue business operations and construct a debt repayment plan.

LLC or Corporation

Chapter 13 is not available for LLCs and corporations either. So, their options are Chapter 7 or Chapter 11 for a company going bankrupt.

Chapter 7:

  • There is no debt discharge for an LLC or a corporation.
  • LLC members can lose personal assets pledged for loans.
  • Corporations may face increased litigation and risk asset liquidation.

Chapter 11:

  • Small businesses can file through an attorney representation only.
  • It helps the business continue operations and construct a repayment plan.

Business Owners

Small business owners can file for joint personal and business bankruptcy as well. Also, they can choose to file for business bankruptcy as a business owner.

Chapter 7:

  • It is suitable for small businesses that want to close business operations and protect personal assets.
  • It protects personal assets and erases personal guarantees.
  • The filer may have to take a bankruptcy means test.

Chapter 11:

  • It is a costly plan for small business owners.
  • It can offer a debt reorganization plan and help businesses continue operations.

Chapter 13:

  • It helps a business continue operations.
  • The trustee will include business valuation as unprotected assets.
  • It can erase personal guarantees and protect personal assets pledged but the business debts must be repaid.