Most people are surprised to hear that ordinarily, there is absolutely no reason for a business to ever file bankruptcy. The bankruptcies you hear about on the news involve large corporations that are restructuring their operations under Chapter 11.
The average small business does not need to file bankruptcy. Normally, the owners dissolve the company and walk away.
More often than not, it is the business owner that needs to file a personal bankruptcy. This is because the debts of the business normally are personally guaranteed by the business owners so that when the business fails, the creditors go directly after the owners of the company personally.
There are, however, certain instances when a business should file bankruptcy:
- When the business has substantial assets that need to be liquidated and distributed to creditors (Chapter 7)
- When a business has a reasonable shot at success and profitability in the future if its finances are restructured under court supervision (Chapter 11)
Chapter 7 for business:
When a company has substantial assets, filing Chapter 7 bankruptcy enables a bankruptcy trustee to oversee an orderly distribution of money to creditors of the business. This virtually eliminates creditor lawsuits over assets and the potential personal liability of the company owners for improper transfers of property to creditors. A business is not entitled to a bankruptcy discharge, but that fact is irrelevant. Winding up the affairs of the business through a bankruptcy trustee is not only an orderly method of dissolution but it may save a lot of money over the costs of hiring a business attorney and/or accountant for that purpose.
Chapter 11 Reorganization
Chapter 11 is a complex court reorganization of a business that might otherwise be profitable if properly restructured. This is only advisable if the business is worth saving — not for reasons based on pride or shame of business failure. Fees for this type of bankruptcy start at $20,000.
Under Chapter 11, leases and secured debts can be negotiated and unsecured debts can be substantially reduced to enable continued business operations with protection from creditors.