Chapter 7 bankruptcy is open to individuals, sole traders, partnerships and corporations. This article will concentrate on the implications for chapter 7 bankruptcy for businesses.
The last couple of years have seen worldwide economic turmoil in which running a business has become increasingly difficult. By definition, being in business means taking risks, and the bigger the risks the greater the rewards.
Unfortunately certain sectors of the world economy have taken those big risks and have had big rewards, but in recent times those risks have proven unsustainable. Because of the nature of some of those businesses, some have been bailed out by the taxpayers of various countries, but others have had to look bankruptcy right in the eye, and gone out of business.
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Whilst chapter 7 bankruptcy is often the favoured chapter for the individual as they emerge debt free and with a financial clean slate, (despite having to have had all their assets liquidated), it is not always the preferred chapter for business.
This is because a chapter 7 filing for a business is basically an application for the liquidation of its assets. It is the same for all business, regardless of size.
The most important thing to do from the beginning is employ the services of a lawyer. They will guide you through the process, and ensure that you meet any criteria for filing. Whilst this may seem like an unnecessary expense, incorrect filing of a claim can cost you money.
What chapter 7 does, is once filed, allows what is called "automatic stay". This means that creditors may no longer contact the owner or any employee of the company seeking debt repayment. It puts an end to harassing phone calls and letters. Everything has to be dealt with through the court appointed trustee.
The trustee also assumes control of the company, and the management team are relieved from their positions. The trustee then has the job of liquidating the assets and distributing the proceeds amongst the creditors. There are 6 tiers of preferential payment, with the first tier being paid in full first, then the second etc. etc.
The primary concern of the business filing chapter 7 bankruptcy, is to retain exempt property and ensure that as much debt as possible is written off.
Obviously, chapter 7 means termination of the business. However, for some people for whom the business may represent a significant investment in terms of time and endeavour, chapter 7 may not be the way that they want to go.
Filing under Chapter 11 for example, allows the business to continue trading, whilst adhering to a court agreed and legally enforceable repayment schedule. The repayment schedule can be a little harsh, but if the company is suffering from short term cash flow problems, a court may decide that it is in the creditor's best interests to allow the company to continue trading and thus generate income, offering the hope of complete repayment.
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