Keeping a business running profitably can be challenging, especially in today’s competitive and high-paced economy. Whether you own a startup or a well-established company, it is easy to unexpectedly find yourself in the red financially. When this happens and you are no longer able to keep up with your business debts, you may be wondering what you can do to take care of your financial obligations while still protecting your business in the long run. Thankfully, there are a few options available to you when creditors come knocking at your door.
No business should file for bankruptcy without first giving their financial situation a lot of thought. There are three different types of bankruptcy that businesses can pursue, and it is important to understand each one thoroughly. The three chapters are:
- Chapter 7: Under this chapter, an appointed trustee takes possession of the business estate and the property. As the business owner, you will be required to attend a “341 meeting” approximately 20-40 days after filing. This meeting is also referred to as the “first meeting of creditors”, and you will be expected to answer a variety of questions about your business expenses, income, assets and liabilities. Your creditors are allowed to attend the meeting and inquire about your company’s financial affairs. If your business has assets, your case will end once the trustee has sold the assets and given the earnings to your creditor.
- Chapter 11: Under Chapter 11 bankruptcy, your company retains the right to your business operation and property. As with Chapter 7 bankruptcy, you will be required to attend a “first meeting of creditors” and answer questions about your company’s financial state. As the debtor, for the first 120 days after the initial filing, you will have the right to file a plan of reorganization that specifies how you will deal with your creditors. Creditors are commonly divided into classes in the plan of reorganization, and each class of creditors must agree upon the aspects of the plan of reorganization that relate to them. Plans of reorganization typically give debtors the chance to repay their debts over a predetermined period of time.
- Chapter 13: In a Chapter 13 bankruptcy case, a trustee is appointed, but the business property and estate are not handed over to their possession. The debtor (your company) is required to attend the “first meeting of creditors” and present detailed information about your company’s financial affairs. A plan must be filed that commits all of your disposable business income to repaying your debts for the next few years. Once the plan has been filed, your business must start making payments within 30 days.
Creditors are not allowed to vote on the plan, but the court must confirm it. Be sure to consult carefully with your attorney prior to deciding which chapter you want to file bankruptcy under.
Selling Your Business
If you don’t feel particularly invested in the future of your business and you are more focused on finding a way out of your debts, selling your business may be an attractive option to pursue. Of course, you will first need to locate a company that is interested in acquiring your business, despite its heavy debt burdens. If you are able to locate a willing buyer, selling your business may be one of the most effective ways to pay off all of your debts or let the buyer assume your debts. If you cannot find a buyer, closing your business, liquidating your assets and settling with your creditors is also an option.
Before deciding what course of action you want to pursue, it is important to carefully consider your various options and decide which one makes the most sense based on your company’s current financial situation and your goals for the future.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.