Bankruptcy in Brief
a service of the Moran Law Group
Home/ Business Bankruptcy
Small businesses and bankruptcy relief
Your business is in trouble: how do you determine if bankruptcy is
necessary or helpful for your situation?
First, is the business a corporation, a partnership, or a
- Corporations, limited liability companies and partnerships are legal entities
separate from their shareholders or partners. They can file Chapter 7 or Chapter
11 bankruptcy in their own right.
for partnerships in Chapter 7
- Proprietorships are just an extension of the
owner: they can't file bankruptcy alone: the proprietor must file bankruptcy, since
the assets and the liabilities of the business are really just one form of
assets of the proprietor. The individual owner may file Chapter 7, Chapter 11 or
Chapter 13 (if the debt limits are met). See Chapter 13
To answer this question, you have to know what has caused the
problems the business now faces and what are the prospects for change:
- Reorganization can't create a market; increase gross revenue, or
make up for a poor fit between the skills available and the skills required to run the
- Reorganization could free up cash from servicing the old debt to
permit current operations; permit rejection of leases or contracts that are no
longer advantageous (an expensive facility lease or improvident equipment purchase); or
prevent the loss of vital assets or cash to creditor collection actions.
In between Chapter 7 liquidation and reorganization, a liquidating
Chapter 13 or Chapter 11 could provide a breathing space for the owners
to sell the business as a going concern or or its assets in something
other than a fire sale.
The resulting proceeds could pay taxes or unpaid salaries; sale of the
business could provide ongoing jobs for the work force under new ownership. The
bankruptcy could then be converted to Chapter 7 or dismissed if bankruptcy protection is
no longer needed. The court will probably condition dismissal of the case on payment
to creditors of the sale proceeds.
pitfalls for management
Bankruptcy reorganization in Chapter 11
requires significant time on the part of the owners and managers to comply with the
requirements of the bankruptcy system, interface with counsel, and negotiate
with creditors. It is usually expensive as well.
The "bankruptcy bargain"
is that, in exchange for the protection of the automatic
stay and other bankruptcy protections, the debtor provides full disclosure of its
financial condition to creditors and the court, both at the beginning of the case and on a
monthly basis thereafter, and operates as a fiduciary for its creditors while the
bankruptcy is ongoing.
A reorganization can drain an already stressed organization of
management's time to participate in bankruptcy proceedings and money since the legal expenses are significant.
fail, usually for lack of a real plan to solve the problems.
Businesses that require little capital, have
few assets, or are really just extensions of the owner's skills and personality are ones that
it may not pay to reorganize. The owners may be better off liquidating the business,
in or out of bankruptcy, and starting over in a fresh entity.
This can be a complex
issue and requires good professional advice to do correctly. Thoughts
on finding a lawyer.
When Chapter 7 is best
A Chapter 7, whether for the individual or a
corporation, may be the best choice when
- the business has no future,
- it has no substantial
assets or qualities that cannot be reproduced after bankruptcy, or
- the debts are so overwhelming that
restructuring them is not feasible.
Individuals can get a discharge of the dischargeable debts and a chance to
Corporations don't get discharges, so a corporation won't get a fresh
start in a Chapter 7, the way an individual does. Nonetheless, a Chapter
7 can provide an orderly liquidation under the direction of the trustee
and at no expense to the shareholders. Creditors are assured that
they will be paid to the extent of the assets available and the priority
of their claim. Former management is assured that the assets that
are available go (after the expenses of the Chapter 7) to pay taxes
for which the individuals may be liable.
More on the liability of "responsible
individuals" for the corporation's taxes.
Planning for Chapter 7
to file a bankruptcy for a corporation
Liquidate in bankruptcy or on your own
issues and bankruptcy questions are frequently complex and individual.
The information contained here is intended to be educational only: it
is not intended to be legal advice nor does it create an attorney client
relationship between the viewer and the firm. You should consult with
a bankruptcy attorney licensed to practice in your state for advice about
your particular situation. See Law on the