Chapter 7 Bankruptcy In Business
Chapter 7 bankruptcy is a liquidation procedure in which a business sells its remaining assets to satisfy its debts to creditors. Liquidating assets to pay creditors will result in the company's inability to operate and the removal of the owner(s)' stake in or rights to the company. Once the court discharges the bankruptcy case, the company will be effectively dissolved. A Chapter 7 bankruptcy is advantageous for a business that has no future earning potential, no assets that could be recovered after the debts are eliminated, or no means to repay its debts through a debt-reduction procedure.
The bankruptcy procedure can be complicated for companies organized as Limited Liability Corporations. Because there are no consistent regulations regarding Limited Liability Companies, the bankruptcy court decides how the business will be dissolved. A Limited Liability Company may have one proprietor, two partnerships, or multiple partnerships. If the courts classify the business as having a sole owner or as a partnership, the business can be dissolved and the assets distributed to the creditors. In this scenario, the owner's possession rights would be terminated and their stake in the company removed. If the LLC is managed as a corporation, the proprietor could transfer ownership to the remaining members or a third party while maintaining stock as a shareholder. To liquidate the company's assets, all of the shareholders must consent to the proceedings. Moreover, if there are any residual assets in the company, they must be divided among the remaining members who have not surrendered their rights.
Chapter 11 Bankruptcy In Business
A Chapter 11 bankruptcy is comparable to a Chapter 13 bankruptcy for an individual in that debts are reorganized and a repayment plan is established. Chapter 11 bankruptcy allows businesses to continue operations while reimbursing their debts. As they strive to repay their debts to creditors, business owners and shareholders can retain their rights and stake in the company. Businesses petitioning for Chapter 11 bankruptcy must have the means to repay their debts and the potential for future earnings in order to continue operations. Chapter 11 bankruptcy allows a buyer to purchase a business's assets without assuming the seller's liabilities. This is advantageous for businesses seeking to transfer their business to a third party.
A Limited Liability Company handles Chapter 11 bankruptcy in a manner similar to that of a corporation. The difficulty stems from the corporation's large number of shareholders. The reorganization procedure can be relatively simple for a single owner. The courts view a business with multiple proprietors as a corporation requiring the consent of all members prior to filing. As part of the repayment plan, the company may obtain a new loan in order to continue operations and give creditors priority over future earnings for debt repayment. The bankruptcy court may enable the business' debts to be repaid by terminating the rights of one or more owners and transferring the business to the remaining members or a third party.
Considerations
Businesses filing for bankruptcy should assess the types of debts owed, their current financial standing, and their prospective earnings potential. Not all debts are dischargeable in bankruptcy, and certain secured debts secured by real property cannot be protected. Non-dischargeable debts are susceptible to liquidation if no payments are made to satisfy the debt. A Chapter 11 bankruptcy can protect property and prevent repossession or foreclosure. Numerous companies that file for Chapter 11 bankruptcy fail to comply with the repayment plan. If the Chapter 11 repayment plan is not completed, the company risks having its operations shut down and its assets liquidated under Chapter 7 bankruptcy. Before filing for bankruptcy in a business, it is recommended to consult with a qualified bankruptcy attorney to review options.
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