When a company can no longer financially support itself, it has two choices – other than taking out additional loans to try to get through the bad times – filing Chapter 7 liquidation or Chapter 11 reorganization bankruptcy. Those who do not believe they can recover by reorganizing would file Chapter 7 liquidation. Before you make this decision, you should always discuss your options with a business attorney with bankruptcy experience.
Chapter 7 Liquidation
If you decide to liquidate your business, you stop all operations. Once the initial bankruptcy petition gets filed with the court, the court appoints a trustee to sell the company’s assets. The trustee uses the money to pay off the company’s debt.
In a Chapter 7, all debt is created equal. Some creditors take priority over others. The trustee pays secured creditors, including bondholders, first since their claims are secured with collateral. In some cases, a contract serves as collateral, thus making that claim a priority claim.
After secured debt, unsecured creditors receive their money. Once the unsecured creditors have been paid, the trustee pays general creditors, such as stockholders. The trustee pays preferred stockholders before common stockholders.
Chapter 11 Reorganization
If you believe that with some help, your business can continue – and even thrive after reorganization, businesses can file Chapter 11. During the Chapter 11 process, the company restructures its debt to make it more manageable. It also gives the company a fresh start. Because Chapter 11 is expensive and complicated, a company must look at all alternatives to see if filing Chapter 11 is the best. If the process fails, then a trustee may liquidate the company’s assets to pay the creditors.
Also, in a Chapter 11, the court often assigns a committee that represents stockholder and creditor interests. The committee, in conjunction with the debtor company, works together to create a reorganization plan that will hopefully get the company out of debt and back on its feet. The process for going through Chapter 11 could take up to two years.
If you are a corporation, your business entity is separate from you, which means that you are not personally liable for your business debts. However, if you are a sole proprietor, you do not have corporate protection to protect your personal assets from creditors and bankruptcy. When you file corporate bankruptcy as a sole proprietor, and sometimes as a partnership, your personal assets are included in the filing. Because a corporation is a separate entity from you, if your corporation files bankruptcy, your personal assets remain separate.
Contact the Tampa Bankruptcy Attorneys at Lieser Skaff Alexander
Our firm is experienced in bankruptcy law, including the Middle District’s local rules for corporate bankruptcy. With the COVID-19 pandemic, many businesses will be looking for help with liquidation or will be looking for a way to restructure debt so that the business can keep running – and keep employees at their jobs. Contact us for a consultation regarding your situation. Our office is open during the pandemic – we will work with you via telephonic conferences and video conferences. And, we can recommend online notaries for those documents that require a notarized signature.