What Happens When A Company Declares Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts. When a business declares bankruptcy, it typically means that the business is unable to pay its debts and seeks protection from its creditors. This article, authored by Robert Stiberman, a seasoned bankruptcy attorney, will explore the process of business bankruptcy and what happens during and after the bankruptcy proceedings.
About the Author – Robert Stiberman
Robert Stiberman is a highly respected bankruptcy attorney with years of experience helping businesses navigate the complexities of bankruptcy law. He is known for his expertise in Chapter 11 bankruptcy, which allows businesses to reorganize and repay their debts while continuing operations. Mr. Stiberman holds admission to the United States District Court for the Southern, Middle, and Northern Districts of Florida, and is authorized to represent bankruptcy clients throughout Florida.
Mr. Stiberman earned his Juris Doctorate from the University of Miami School of Law and has been a member in good standing of the Florida Bar since 1998, maintaining an impeccable standing within the legal community. Moreover, he brings a wealth of experience as a former Supreme Court Certified Mediator, augmenting his ability to facilitate constructive negotiations and mediations.
Mr. Stiberman has more than 15 years of experience serving bankruptcy clients throughout Florida and has successfully filed and obtained a discharge in more than 1,000 bankruptcy cases. Robert is one of the top bankruptcy attorneys in Florida, with a track record of success to prove it. Robert and the office team consistently receive positive reviews for their hard work.
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Types of Business Bankruptcy
A business can file for several types of bankruptcy, but the most common are Chapter 7 and Chapter 11 bankruptcy. The type of bankruptcy a business files for will depend on its financial situation and prospects.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, or “liquidation” bankruptcy, involves selling assets to repay creditors. In this type of bankruptcy, a trustee is appointed by the court to oversee the process and sell any non-exempt assets. Once the assets are sold, the proceeds are used to pay off creditors in order of priority.
Most small business owners prefer to file for Chapter 7 because it allows them to completely discharge their debts and start fresh with a clean financial slate. However, not all businesses qualify for Chapter 7, so it’s essential to consult with an experienced bankruptcy attorney before filing.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy, or “reorganization” bankruptcy, allows businesses to continue operations while paying off their debts. In this type of bankruptcy, the business must submit a reorganization plan to the court for approval. The plan outlines how the business will repay its creditors and regain financial stability.
Filing for Chapter 11 can be a complex and costly process, but it may be the best option for businesses with a chance of long-term success. It is often used by larger companies or corporations that want to restructure their debt and continue operating.
The Bankruptcy Process
- Filing for Bankruptcy: The first step in the bankruptcy process is filing a petition with the bankruptcy court. This document outlines the business’s financial situation, including its assets, liabilities, and income.
- Automatic Stay: Once the petition is filed, an automatic stay goes into effect. This prevents creditors from taking any action to collect debts, such as filing lawsuits or repossessing property – Source 11 U.S. Code § 362.
- Initial Debtor Interview (IDI): During the Initial Debtor Interview (IDI), the bankruptcy trustee meets with the Chapter 11 debtor to review the bankruptcy petition and schedules, inquires about the debtor’s business plan, and gathers additional information about the debtor’s financial situation. This meeting helps verify the information provided and ensures that the debtor(s) understand their rights and obligations. It’s crucial for the debtor(s) to be prepared, provide accurate information, and cooperate with the trustee.
- Meeting of Creditors: The business must attend a meeting of creditors, where creditors can ask questions about the business’s finances and the bankruptcy process.
- Asset Liquidation or Reorganization: In Chapter 7 bankruptcy, the business’s assets are liquidated, and the proceeds are used to repay creditors. In Chapter 11 bankruptcy, the business creates a reorganization plan to repay its debts over time – source Chapter 11 – Bankruptcy Basics.
- Discharge of Debts: Once the bankruptcy process is complete, the business receives a discharge of debts, meaning it is no longer legally obligated to repay the debts included in the bankruptcy filing.
Effects of Bankruptcy
- Credit Score: Filing for bankruptcy can significantly negatively impact a business’s credit score, making it difficult to obtain credit in the future.
- Business Operations: Bankruptcy can disrupt a business’s operations, mainly if assets are liquidated or if the business is required to adhere to a reorganization plan.
- Personal Liability: In some cases, business owners may be personally liable for some or all of the business’s debts, especially if they guaranteed the debts or engaged in fraudulent behavior.
After Bankruptcy
After a business declares bankruptcy, there are several key considerations and steps that business owners should take to move forward:
- Rebuilding Credit: While bankruptcy will have a negative impact on a business’s credit score, it is possible to rebuild credit over time. This can be done by responsibly managing finances, paying bills on time, and avoiding excessive debt.
- Financial Planning: It’s important for business owners to create a financial plan to ensure that they can meet their financial obligations and avoid future financial difficulties. This may involve creating a budget, reducing expenses, and increasing revenue.
- Legal and Regulatory Compliance: Business owners must ensure they comply with all legal and regulatory requirements following bankruptcy, including tax obligations and any requirements related to the bankruptcy proceedings.
- Reevaluating Business Structure: Bankruptcy may be an opportunity for business owners to reevaluate their business structure and make changes to improve profitability and sustainability.
- Seeking Professional Advice: Business owners should seek professional advice from attorneys, accountants, and financial advisors to help navigate the post-bankruptcy landscape and make informed decisions about the future of their business.
The Impact on Stakeholders
Employees: Bankruptcy can have significant implications for employees, including layoffs or changes to their employment terms. The bankruptcy process may also affect employee benefits and pensions, so it’s important for businesses to communicate openly with employees throughout the process.
Creditors: Creditors are impacted differently depending on the type of bankruptcy and their position in the creditor hierarchy. Secured creditors, such as banks with liens on business assets, may recover some or all of their debt through asset liquidation. Unsecured creditors, such as suppliers or vendors, may receive partial repayment or nothing at all, depending on the available assets and the terms of the bankruptcy plan.
Shareholders: Shareholders in a bankrupt business typically lose their investment, as the value of their shares is often wiped out. However, in some cases, shareholders may have the opportunity to participate in the reorganization of the business and retain some ownership stake.
Customers and Suppliers: Bankruptcy can disrupt relationships with customers and suppliers, especially if there are delays or changes to business operations. Businesses should communicate openly with customers and suppliers to minimize disruptions and maintain positive relationships.
Legal and Tax Considerations
Business owners should be aware of the legal and tax implications of bankruptcy, including potential personal liability for business debts, tax consequences of debt discharge, and compliance with bankruptcy laws and regulations. Seeking professional legal and tax advice can help business owners navigate these complexities and avoid potential pitfalls.
In Conclusion
Declaring bankruptcy is a significant decision for any business, with long-lasting consequences. It’s important for business owners to understand the bankruptcy process and seek professional legal advice to navigate the process successfully.
Both Chapter 7 and Chapter 13 bankruptcy have their pros and cons, and the best option for you will depend on your individual financial situation. If you are considering either of these options, we recommend speaking with a bankruptcy attorney to get expert advice.
Disclosure: This article is intended for informational purposes only and should not be construed as legal advice. If you are considering bankruptcy for your business, it is important to seek the advice of a qualified legal professional who can provide guidance tailored to your specific situation.
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Contact The Stiberman Law Firm, Florida’s Most Experienced Bankruptcy Attorney
If you are considering filing for bankruptcy for your business, please contact our office at 954-922-2283 for a free case evaluation. Our main office is located at 2601 Hollywood Blvd., Hollywood, FL 33020, and we strive to serve and represent clients throughout Florida.
References
- U.S. Courts, “Bankruptcy Basics,” https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
- U.S. Courts, “Chapter 11 Bankruptcy Basics,”
- Cornell Law School, Legal Information Institute, “11 U.S. Code § 362 – Automatic stay” https://www.law.cornell.edu/uscode/text/11/362
