Facing the Inevitable: When Business Bankruptcy May Be Your Only Option
“Capitalism without bankruptcy is like Christianity without hell.” —Frank Borman
Bankruptcy was a big topic in this year’s presidential campaign. With President-elect Trump previously filing for bankruptcy protection, the topic has probably never before received so much attention.
As much as I don’t want to admit it, I have personal experience with bankruptcy. A failed business, regardless of the reasons, can often leave you in a position where you have no other choice. While most of the advice I write about is on starting a business, I thought it would be a great time to talk about what to do when your business is failing.
Keep in mind that being broke is not always a reason to close your business. In fact, that is why there are numerous options afforded to you as a debtor.
What Are the Most Common Types of Business Bankruptcies?
According to restructuring attorney Suzzanne Uhland from O’Melveny & Myers LLP, there are two main types of business bankruptcies: Chapter 11 (reorganization) and Chapter 7 (liquidation).
Chapter 7 is pretty obvious. When you file for Chapter 7, all your assets are turned over to a trustee who liquidates what is left and sends the proceeds to your creditors. Chapter 11 is a little trickier, but is the road to choose if you are looking to stay in business, despite not being able to pay your debt.
“There are different types of Chapter 11 bankruptcies,” explains Uhland. “A so-called ‘prepackaged’ bankruptcy is a Chapter 11 filed after the company has obtained the necessary creditor support for its reorganization. A prearranged ‘363’ bankruptcy is a Chapter 11 filed by a company after it has entered an agreement to sell its assets (Section 363 is the section of the Bankruptcy Code that authorizes sales).”
Benefits of Chapter 11 vs. Chapter 7
The list of benefits for Chapter 7 is pretty short. By filing for Chapter 7, you get rid of your debt obligation. You will no longer owe your creditors and will generally only be liable for certain debts that are nondischargeable such as taxes for individual debtors.
The benefits of Chapter 11 are different. You basically will not be liable for all of your debt (although you will have to pay a portion as determined by the court). You will also be allowed to operate your business in most cases while you make the income to pay back the restructured debt.
“Chapter 11 is the appropriate avenue if a company files to reorganize,” says Uhland. “It is almost always the preferred route to maximize value of the company if it seeks to sell its assets through bankruptcy. Most large companies file Chapter 11, which generally permits current management to remain in control of the company. If a company files Chapter 7, it will be liquidated by a Chapter 7 trustee appointed by the court.”
How Long Does the Process Take?
“Different types of bankruptcies take vastly different amounts of time,” says Uhland. “A ‘prepackaged’ bankruptcy may be as quick as 45 days from filing to emergence from Chapter 11; a complex Chapter 11 can last years. Most of the time spent in Chapter 11 is used to negotiate and obtain creditor support and ultimately court approval of the plan. Once court approval is obtained a plan can become effective and the debtor discharged in a matter of days if all conditions to effectiveness are satisfied.”
Final Thoughts on Bankruptcy
Bankruptcy can be a complicated process. Keep in mind that although I have a law degree, only an attorney in the jurisdiction where you do business is qualified to give you specific advice. This post should be treated as general information to help direct you to a qualified professional who can help.
Bankruptcy seems taboo, but it is a part of life. Sometimes you have no choice but to liquidate your business, and no one should fault you if that is your only option. If you still want to continue your business despite heavy debt, be thankful you live in a country that affords you such an option.
