Company Bankruptcy Filing

Corporate Bankruptcy

When a public company files for bankruptcy under federal bankruptcy laws, there are many complex and complicated issues to consider. What can happen to the company? Can the company continue to do business, or is it automatically liquidated? What about investors, vendors, and others that may have an ownership stake in the company? And those questions just scratch the surface.

In a broad stroke of explaining a corporate bankruptcy, when a company is faced with crippling debt, a downturn in the business and/or business climate and is unable to continue to be profitable a decision must be made about that company’s future. Generally speaking, the federal bankruptcy laws govern and dictate how a company handles going out of business or dealing with overwhelming debt. Depending upon the dynamics of the company, the debt, the assets and the company’s viability to continue to try to business will help to steer the decision to either Chapter 11, or "reorganization" or Chapter 7, "liquidation.

The bankrupt company, also known as the "debtor" can file Chapter 11 of the Bankruptcy Code to "reorganize" its assets and business and continue to do business. While the management continues to handle the small, dailiy details of the business, the bankruptcy court must approve of any large scale business decisions. The company’s stocks and bonds may still continue to be traded with the oversight and involvement of the SEC (Securities and Exchange Commission). Meanwhile, a plan is developed that will be the potential blueprint as to how the company will deal with the debt and emerge from the reorganization as a viable, healthy business once again.

That plan that is developed to get the company out of debt and back to profitability must be approved by the creditors, stockholders and bondholders and, of course, confirmed by the court. However, the court could confirm the bankruptcy without the approval of the other parties if they feel that the plan would be fair and actionable.

And, of course, a company may begin the Chapter 11 bankruptcy process and still end up liquidating if it is unable to turn the business around and become profitable.

The company can also file Chapter 7 of the Bankruptcy Code and cease all business operations. The court appoints a "trustee" to liquidate the company’s remaining assets to pay off debt that is owed to creditors and investors. All administrative and legal fees are paid first, then the creditors and/or investors.

In this case, after legal fees and administrative fees are handled, how are the investors paid?

1. First in line are the investors who the secured creditors because they extended the credit to the company based off of tangible assets of the company.

2. Bondholders are typically next in line as the bonds actually represent the debt of the company. The company issues the bonds with the pledge to pay interest and return their principal. The full principal may not be paid back, however, depending upon the liquidation.

3. Stockholders are next. While they own a stake in the company, it is done with much more risk. So when the company is doing extremely well, so does the shareholder. Unfortunately, when the company does poorly, or goes under, the shareholder stands to lose money, or receive nothing at all.

4. Last, but not least, are the owner(s) of the company. They would be the last to be paid if the company goes bankrupt.

This is a very broad recap of how a corporate bankruptcy works. If you, or you company, is looking into a corporate bankruptcy, you should talk immediately to a bankruptcy attorney. If you have concerns that you are doing business with a company that may be on the verge of bankruptcy, or a company that is in bankruptcy, you also have rights and should contact a bankruptcy attorney or securities attorney. If there has been any fraud involved you should know your legal options. Furthermore, if you have questions about a company entering bankruptcy or in bankruptcy and you own stocks or bonds in that company you can contact the company’s investor relations representatives, the broker who sold you your investment, even contact the bankruptcy court hearing the company’s bankruptcy. The bottom line is that a reputable bankruptcy attorney can help you understand your options whether you are the owner of the company, a vendor of the company, or an investor.

Small Business Bankruptcy

If your small business is facing overwhelming debt and your business is in trouble, there are bankruptcy options for you and your small business.

If your business is a corporation, limited liability or partnership, you can file Chapter 7 or Chapter 11. These types of business are legal entities that are separate from their shareholders or partners.

If your business is a proprietorship, your business is basically an extenstion of you, the owner. You cannot file bankruptcy "alone", as assets and debts of the proprietorship are actually YOUR assets and liabilities as the proprietor. You, as the individual owner, can file Chapter 7, Chapter 11 or possibly Chapter 13.

For a small business, Chapter 11, a reorganization, takes a huge amount of work of everyone involved with the business, as well as legal counsel, working with the bankruptcy courts, and dealing with your creditors. You have to be prepared for a great deal of negotiation, energy and time. A full and thorough accounting of your assets and liabilties is disclosed to the bankruptcy court and creditors, and this financial reporting is continued throughout the process. However, with this process, your business comes under the automatic stay, which can give you, the time and room to continue to do business without having to be dealing personally with your creditors.

Unfortunately, few small business emerge from Chapter 11. This process becomes overwhelming, the time that it takes to deal with the bankruptcy AND the daily business matters is simply too daunting. Even with legal counsel and best intentions, it is often just too complicated to draft a plan that not only addresses the debt of the company, but also how they will come out of this "meaner and leaner" and able to do business in what can be a struggling business niche to begin with.

The reality is that for many small businesses, Chapter 7, or liquidation, is the best solution. If the business niche is oversaturated, or a niche that is struggling, it may not be viable for a business to continue in that business environment. Your small business may simply not have assets or a special qualiity that can keep your business viable, such as a strategic advantage, or intellectual properties that will make the business viable for the long run. Finally, many small businesses simply have too much debt and too few assets and a restructuring is simply not possible.

In Chapter 7, corporations don’t get the same kind of discharge as an individual does. Instead, in Chapter 7, the business liquidates the assets with the direction of the trustee that is appointed. Creditors are paid depending upon the liquidated cash amount of the assets and where they stand in line. Some creditors may be "secured" in that they extended the credit based off of tangible assets (which are now being liquidated).

Because corporations don’t get the discharge, and "fresh start" if you will, why not just cease operations, sell off what you can and let the state just end the corporate existence? Aside from the ethics of such a decision, there are legal issues that make it a better choice to still go through the Chapter 7 process. You may have creditors that can lien or levy assets for which you are personally liable and have personally guaranteed. Even if you are not legally liable for the debt, your creditors can sue you, and make for a very expensive court battle, also tying up your time in attempting to obtain a new job or launch a new company.

These decision are complex and difficult at best. There are many emotional components to the bankruptcy question as well, as a small business owner, it is devastating to think of your hard work, your sweat equity and your dream being dismantled, sold off and ending in a manner that you never wanted to imagine. There are ethics involved, and many small business owners do not want to think of how it will be seen and handled by fellow business owners, business connections and the community at large. A small business owner can feel like a failure, and this time can be incredibly stressful, impacting their life in a variety of ways.

This brief explanation of how a small business can be impacted by bankruptcy is just that, a brief recap. This does not constitute legal advice. There are far more complex issues and considerations beyond these few paragraphs that you will need to consider and potentially face should you file for bankruptcy.

However, there are small business bankruptcy attorneys that can make this process far easier for you, can assist you in getting the bankruptcy done quickly and efficiently so that you can move on, and can make sure that you are legally covered to the best extent possible. A bankruptcy attorney will make sure that your best interest in considered at every step, and that you make the right decisions for you and your business.

“To Bankrupt or Not To Bankrupt”, that is the question that small business and big business owners alike ask themselves when their once-promising business start up is well past a tune up and is in trouble.

This economy is challenging for many businesses.  Not only are sales suffering, but costs in many cases are still rising.   Credit is getting tougher and tougher for businesses to tap into, and credit costs for some are also on the rise.  Many businesses are more “recession proof” than others, and those businesses that suffer the most are those that are embattled on every front.  Often at no fault of the business owner other than a tough economy, skittish consumers spending less, a tightening credit environment and other variables well outside of that business owner’s control…not a flawed business plan or irresponsible owner.

When faced with what to do with a business that is floundering and the debts and assets alike that have accumulated over the life of the business, many business owners are left confused, sometimes in denial, often overwhelmed and finding it difficult at best to have to think through the “worst case scenario” options rationally.   It is a complex maze to navigate, and one that not only has legal implications, but emotional and ethical issues to handle.

Putting the emotions aside can be very difficult.  A small business is often your “baby”, a dream that you made real and something that you not only put your equity into, but also your sweat equity.  It was to be an annuity, a business that could support you and your family into retirement, a business that could be passed along to your children or sold to another investor and future business owner/operator.

The ethics and the legal issues are complex.  Companies can opt to simply liquidate their assets and close there doors, effectively ceasing all operations.  This can be done without a bankruptcy filing.  While heartbreaking, it is one way to handle a business that cannot be resuscitated.  In this way, you liquidate the assets, attempting to get the most money that you can for them and you decide where those funds are distributed.  You can ensure that you take care of pending payroll issues, taxes, or the creditors that you want to pay first.

And, the assets can vary as well as their ease in liquidation.  Intellectual property, customer and vendor lists, leases, property, equipment, license.  Do you know how best to sell those and/or return them?  Can you manage to sell the assets, and are there other managing interests that you have to address?    With the price of real estate in many markets a real challenge, how will you sell any property or buildings that are part of the assets of your business?  Will you lose security deposits; can you terminate a lease or sublet? 

And, of course the process varies if you are incorporated, a partnership or a sole proprietorship.   You need to know how liquidating assets in each scenario affects you and your business.  You also need to explore what bankruptcy means to each type of business setup.  Even incorporated businesses have different dynamics depending upon if it is an LLC, a C corporation, an S corporation or even non-profit.

As you can see, this can cause a business owner long term stress and legal issues.  In addition to dealing with these issues on your own, your creditors can and most likely will sue you and/or the officers of the business and the corporation.  While the individual involved can claim that they have to assets from which to pay a law suit,  that individual, or those individuals, have to spend a great deal of time in court defending themselves and may find a judgment is entered against them. 

If a business declares bankruptcy, it may protect certain assets from creditors and the automatic stay gives the business the ability to settle taxes and payroll instead of aggressive creditors obtaining all assets.  In addition a trustee manages the liquidation of assets and distribution of funds.  This allows you to manage your affairs while the bankruptcy process is ongoing. 

You may find yourself able to stay open while your debt is restructured as well.  This allows you to continue to operate and attempt to run your business with less stress and with restructured overhead.   This can bring business owners hope and time to repair business issues that can positively impact their ability to survive this economic downturn and come out stronger, “leaner and meaner” and a completely viable business for the years ahead.

The bottom line?  Contact a bankruptcy attorney in your area that understands how to help a business through this complex process.  Bankruptcy has long term affects on you, your ability to do business in the future, obtain loans and more.  What is offered here are just some general, broad thoughts and questions to ponder.  Your business, your finances and your situation is most likely far more complex, and you want sound legal representation to ensure that you cover every base and protect yourself, your assets, your financial future and your entrepreneurial future.

Company Bankruptcy Filing Resources is intended to inform you about the different aspects of a business bankruptcy, the issues surrounding bankruptcies for small businesses and offer tips and resources to assist you on your path to making the right decision for you and your business.  Ultimately, this is not legal advice, the opinions offered are simply that and you should always confer with an attorney before making any business decision as important and crucial as bankruptcy.