Business Bankruptcy

Bankruptcy Explained
1.    Bankruptcy is a processtypically initiated by business entities (IE corporations, companies and public/private organizations) to achieve financial relief. When a business’ debt to equity ratio is skewed—when the corporation’s debts greatly exceed their assets or profit margins—the entitymay file for bankruptcy to clear their debts and obtain financial relief.

2.    Business bankruptcy allows an entity to recreate their business model. Corporations who fail to meet their debt obligations may file for bankruptcy byliquidating their assets or developing a repayment plan through the inclusion of an intermediary (i.e. government agency.)
3.    An entity can choose from one of four different forms of business bankruptcy. Each type of classification alleviates the debt obligation of a business through the liquidation of assets or the creation of a repayment plan.

Types of Business Bankruptcy
1.    Chapter 7 Bankruptcy: Chapter 7 Bankruptcy is a common form of business bankruptcy that forces an entity to liquidate their particular assets to help repay their debt obligations. When the entity’s assets are liquidated they are sold; the assets gathered from the liquidation are then used to repay the company’s debt obligations. When an entity files for Chapter 7 bankruptcy, a trustee is appointed to take charge of the business and proceed with the liquidation process. When the assets are liquidated, the creditor then files a claim with the local court system to request repayment from the business or corporation in debt. The assets are then divided among the creditors and distributed based on the coordinating repayment obligation. In addition to the repayment of debts, a company filing for Chapter 7 bankruptcy is required to pay fees and costs associated with the use of a trustee.
2.    Chapter 11 Bankruptcy: Chapter 11 bankruptcies offer struggling businesses time to reorganize or restructure their debt obligations. The valuable time offered enables the business entity to restructure their business model and adjust their repayments as necessary.  When a business entity files for Chapter 11 bankruptcy, it is generally allowed to continue business operations—the business operations must be supervised by their local bankruptcy court and without interference from creditors. The entity under a Chapter 11 filing must negotiate a repayment plan with their respective creditors; such repayment plans develop incremental payments for the entity to fulfill their debt obligation. The repayment plan is agreed upon through mediation and administered by the local bankruptcy court.
3.    Chapter 13 Bankruptcy: IN most instances, a business entity is not permitted to file for Chapter 13 bankruptcy. The Chapter 13 Bankruptcy plan is offered to individual employees. This structure in turn, covers all expenses that the individual employee may owe due to a failed business venture. As a result of the characteristics associated with Chapter 13 Bankruptcy, sole proprietorships typically file for this form of bankruptcy. For a Chapter 13 filing to be initiated, the court and creditors must pre-approve a repayment plan. The repayment plan allows creditors to collect debt while protecting the property of the debtor. To affirm the filing, the applicant must prove a source of income as a means to meet the debt over a period of 3-5 years. This form of bankruptcy is viable for those individuals who, because of a failed business venture, are stricken with debt.