How Can Bankruptcy Help Big and Small Businesses Keep Running

On May 10, 2017

Debtors opt in for bankruptcy for many reasons. As The BK Lawyers warn, most of the times, these reasons are beyond the debtor’s control. The same goes for businesses, big and small ones alike. The sad truth is that not every new startup will succeed and not all established businesses last forever.

In most cases, filing for bankruptcy is the only viable option for an indebted business. However, there are several types of bankruptcy, and not all of them will give the business an equal chance to keep going. The most commonly used bankruptcy type among businesses is Chapter 11 bankruptcy.

Filing for Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is often referred to as debt reorganization and is most commonly used by large corporations. Debtors favor this bankruptcy plan as it allows them to continue running their business and keep making aprofit while simultaneously repaying their debts.

Chapter 11 bankruptcy has many advantages and a few downsides. Experienced bankruptcy attorneys most commonly suggest this plan to indebted businesses.

Business failure

The Pros

Chapter 11 Bankruptcy plan allows the debtors to reorganize their finances. After the debtor files for Chapter 11 bankruptcy, the court issues a stay that serves to prevent creditors from collecting repayment. During the period when automatic stay is in action, the debtor devises a repayment plan.

Similarly to Chapter 13 Bankruptcy, the debtor receives many benefits including reduced debt amounts and decreased interest rates. Therefore, Chapter 11 Bankruptcy plan is often referred to as a reorganization plan.

During this period, the business should aim to stay profitable and at the same time settle their debt through the monthly rates agreed upon by the creditors. During this period business owners aim to renegotiate leases, contracts and any other debts so they get the amounts decreased or discharged. Creditors favor this repayment plan as well, as the compensationitoffers is often more lucrative than a Chapter 7 plan would be.

Under the Chapter 11 plan, repayment rates are sorted out according to classes and priorities. The highest priority is reserved for unpaid employee wages and federal or state tax agencies.The debtor first has to settle the debt their business owns to these parties.

While every creditor is classified accordingly, unsecured creditors belong to a single class. Once the court approves their repayment plan, the debtor is required to settle any debt to all creditors according to the approved plan.

The Cons

While the Chapter 11 Bankruptcy has its advantages, it is not without flaws either. While it allows businesses to keep running, filing for Chapter 11 bankruptcy is an expensive and long process. Although they are not forced to sell their assets, the fees associated with filing for Chapter 11 bankruptcy are very high. This can hit businesses looking to keep going very hard.

Furthermore, after their repayment plan is approved, debtors will be paying offtheir old debt for years and years to come. This can significantly hinder their business as they struggle to keep it profitable.

On top of that, their repayment plan has to be approved by the court. Naturally, coming up with a mutually beneficial plan can prove impossible.

Chapter 11 Repayment Plan For Small Businesses

Small businesses have filed their bankruptcy under Chapter 11 as well. Small businesses with 500 or fewer employees often have the choice between Chapters 7 and 11. Both plans give them more time to come up with an affordable repayment plan and more time to negotiate the deal with the creditors.

However, while Chapter 7 gives businesses only two weeks to negotiate, Chapter 11 gives them six months days to devise a plan. Chapter 7 involvesliquidating assets to pay off the debt, which is why businesses are often forced to close after paying off the debt.

Meanwhile, Chapter 11 is sometimes too expensive for small businesses to even consider. Although their assists are not liquidated, the filing fee is much higher than the Chapter 7 fee as are the court costs. If your business is trying to recover some of the money, Chapter 11 is probably not your best choice.

When to File for Bankruptcy?

Bankruptcy attorneys often advise that the right time for your business to file for bankruptcy is when your personal assets become at risk. If you are a sole owner, you will be held liable for the debts of your company. If those debts begin to amass, attorneys recommend filing for bankruptcy to avoid risking your personal assets.

Furthermore, if your business is sustainable but hindered by debts, bankruptcy can help you organize your business and get a fresh start.

Finally, if your business is not viable and all you get for your hard work is more debt, consider bankruptcy as a way to get out unscathed and try your luck with more profitable opportunities.

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