Financial challenges can make it difficult for a business to keep up with loans, leases, vendor obligations, taxes, and other operating expenses. Business bankruptcy may provide certain businesses and business owners with a structured legal process for addressing debt, reorganizing financial obligations, or winding down operations.
Bankruptcy Lawyers Vegas provides general information about business bankruptcy and the options that may be available under different chapters of the Bankruptcy Code.
What Is Business Bankruptcy?
Business bankruptcy is a federal legal process used to address debts that a business cannot manage under its existing financial circumstances. The appropriate type of bankruptcy can depend on the business structure, financial condition, assets, debts, and whether the business intends to continue operating.
Depending on the circumstances, bankruptcy may involve liquidation, restructuring, or a court-supervised repayment process.
Chapter 7 Bankruptcy for Businesses
Chapter 7 bankruptcy may be used when a business is unable to continue operating and needs to liquidate its assets. A bankruptcy trustee generally takes control of nonexempt business assets and distributes available proceeds to creditors according to bankruptcy law.
Corporations and limited liability companies generally do not receive a Chapter 7 discharge in the same way an individual debtor may. However, Chapter 7 can provide an organized process for closing a business and addressing creditor claims.
Chapter 11 Business Bankruptcy
Chapter 11 bankruptcy is generally associated with business reorganization. It may allow a qualifying business to continue operating while restructuring debts and financial obligations under a court-approved plan.
Depending on the case, Chapter 11 may involve restructuring loans, addressing contracts and leases, negotiating creditor claims, or modifying other financial obligations.
Subchapter V for Small Businesses
Certain qualifying small businesses may be eligible for Subchapter V of Chapter 11. This process was designed to make reorganization more streamlined for eligible small-business debtors.
Specific eligibility requirements and debt limits apply and may change over time.
Sole Proprietors and Bankruptcy
A sole proprietorship is generally not legally separate from its owner. As a result, business and personal debts may both be relevant when a sole proprietor considers bankruptcy.
Depending on eligibility and circumstances, an individual business owner may consider Chapter 7, Chapter 13, or Chapter 11 bankruptcy when addressing business-related obligations.
Debts That May Be Involved in Business Bankruptcy
A business bankruptcy may involve obligations such as:
- Business loans and lines of credit
- Commercial leases
- Vendor and supplier balances
- Equipment financing
- Business credit cards
- Certain tax obligations
- Lawsuit judgments
- Personally guaranteed business debts
The treatment of each obligation depends on the bankruptcy chapter, the nature of the debt, collateral, guarantees, and other circumstances.
Personal Guarantees and Business Debt
Business owners sometimes personally guarantee loans, leases, credit cards, or other business obligations. Closing or filing bankruptcy for the business does not necessarily eliminate the owner’s personal responsibility for a guaranteed debt.
The effect of a personal guarantee should therefore be considered when evaluating business and personal bankruptcy options.
The Automatic Stay
Filing a bankruptcy case generally creates an automatic stay that temporarily stops many collection activities against the debtor. Depending on the case, this may affect certain lawsuits, collection demands, repossessions, and other creditor actions.
Exceptions and limitations apply, and creditors may sometimes ask the bankruptcy court for permission to proceed with particular actions.
Understanding Business Bankruptcy Options
Choosing between liquidation, reorganization, and alternatives to bankruptcy can involve important financial and legal considerations. Business structure, secured debt, taxes, personal guarantees, assets, cash flow, and plans for future operations can all affect the available options.
Understanding how business bankruptcy works can help business owners evaluate potential approaches to financial distress and determine what questions to consider before taking further action.
