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When Does A Company File For Bankruptcy

Cooperating With The Trustee

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Bankruptcy filers have an obligation to cooperate with the trustee throughout their bankruptcy case. Filers will need to provide the trustee with a copy of the tax return for the year the case was filed.

After the meeting of creditors the trustee will file a Report of No Distribution indicating that no funds are going to be distributed to your creditors or a Notice of Claims Bar Date stating the due date for creditors to file claims to receive funds in your bankruptcy. Other than these filings, ideally you will not hear from the trustee after the meeting of creditors.

Chapter 7 For Corporations And Llcs: How It Works

Unlike Chapter 11 bankruptcy, Chapter 7 doesn’t have a mechanism that allows for the continued operation of a corporation or LLC. Filing this chapter will shut down the company.

The bankruptcy trustee will sell all of the corporation or LLC assets and distribute the proceeds among creditors according to the priority rules established in bankruptcy law . The goal is an orderly business liquidation.

Not only will filing Chapter 7 close the business, but corporations and LLCs don’t receive a debt discharge. It isn’t needed. A creditor can’t collect from the company once it’s no longer operational. Nothing of value will be left to take.

Also, leaving the debt in placerather than wiping it outallows a creditor to pursue actions against individuals when appropriate. For instance, a creditor might seek payment under a personal guarantee , or pursue litigation under an alter ego or fraud theory .

Act Before A Lien Is Placed On Your Property

Bankruptcy can stop a wage garnishment, even one that is in process. It can also stop most creditors from taking money from your bank account, the only exception being if you bank where you owe money. However, bankruptcy does not deal with secured debts. That means if your creditor places a lien on your home or other property, they will be entitled to continue to seize and sell those attached assets even if you file bankruptcy.

If you have received a judgment order that you cannot pay, talk to a Licensed Insolvency Trustee to find out how a consumer proposal or bankruptcy can help in your situation.

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The Small Business Case And Small Business Debtors

The Bankruptcy Code allows small business debtors to file for relief under two different special categories of chapter 11 intended to streamline processes and reduce costs. The first, referred to as a small business case ), was created in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act , and the second, referred to as subchapter V, was created in 2019 by the Small Business Reorganization Act . A debtor may elect either of these two options based on certain eligibility criteria. Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed. The two types of cases have different debt limits, defined as the total amount of noncontingent liquidated secured and unsecured debt at the time the debtor files their bankruptcy case.

In addition to accelerated deadlines and faster plan confirmation, small business and subchapter V cases have other key differences from ordinary chapter 11 cases: a creditors committee is not automatically appointed and instead will only be appointed upon a showing of cause, 11 U.S.C. § 1102, and the debtor or debtor in possession has additional duties, 11 U.S.C. § 1116.

When A Company Is Bankrupt

What happens when you file for bankruptcy?

If youre insolvent, cease trading immediately.

Dont pay anyone, including yourself, and take careful notes of all your actions. Youll need to ensure youre not breaching any responsibilities, which could land you in hot water later on.

As the director of a bankrupt company, your primary responsibility is no longer to your shareholders, but to your creditors.

Whether you choose to liquidate the company and write off the debts, or to try to rescue it via a company voluntary arrangement, youll need to seek advice from an insolvency practitioner.

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Understanding Cash Collateral Orders

As a company that has filed Chapter 11 bankruptcy continues to do business, it will likely bring in money from accounts receivable and/or sale of inventory or property. That income is placed in a cash collateral account. This cash cannot be used without court order.

If you choose to do business with a company in Chapter 11 bankruptcy, verify that the company has the authority to spend cash collateral. Often, cash collateral is subject to a creditors lien. So, if you conduct a business transaction with a company after it has filed Chapter 11, and the company pays you from cash collateral it was unauthorized to spend, that transaction can be challenged in court and you may be ordered to pay back all the money you received for that transaction.

Circumstances When Involuntary Bankruptcy May Occur

Involuntary bankruptcies are typically filed against companies that cannot manage to pay their debts in due time but have assets out of which creditors would be able to recover their money. In other words, creditors can urge a company to file for bankruptcy when they are aware that it has the ability to pay its debts but it is not willing to do so.

However, in real life, when a company is ‘forced’ to file for bankruptcy, what usually happens is that it will opt for one of the voluntary bankruptcy procedures. Practically, the company’s director decides to file for bankruptcy due to the financial situation that leaves no hope for revival and, probably, the creditors’ pressure. In this case, the company will voluntarily choose one form of bankruptcy either Chapter 11 which is a reorganization process or Chapter 7 which means liquidation. It’s essential to stress once again that involuntary bankruptcy rarely occurs and being convinced to file for voluntary bankruptcy is not the same as being forced to go through involuntary bankruptcy.

Furthermore, when a company chooses to go into bankruptcy, it immediately becomes bankrupt and it is supervised by the court and governed by the bankruptcy code. Conversely, if the company is forced into it involuntarily, its status doesn’t automatically change.

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What Is Business Bankruptcy

The type of bankruptcy that most people think of when they hear this word is Chapter 7. Filing for Chapter 7 bankruptcy usually results in liquidation. Business assets are distributed to creditors, so the business shuts down. This is the most common and least favorable type.

On the other hand, Chapter 11 and Chapter 13 do not share this reputation. These two usually result in the reorganization or consolidation of the businesss debts. Plenty of companies have filed for Chapter 11 or Chapter 13 while maintaining operations and are even alive and kicking today.

The type of bankruptcy you file for depends on your businesss debt and overall financial health.

Advantages Of Chapter 13 Bankruptcy For Small Business Owners

What Happens To Shareholders When A Company Files Bankruptcy

In Chapter 13, you get to keep all your assets and pay back all or a portion of your debts through a repayment plan. If you are a sole proprietor with a lot of business assets, a Chapter 7 trustee may sell them if you don’t have adequate bankruptcy exemptions to protect the property.

By filing a Chapter 13, you can protect all business assets and keep the business running while reorganizing your debts. Keep in mind, however, that you must pay the value of nonexempt assets through your repayment plan, which can pose a problem if your ownership interest in the business is substantial.

Even if your business is a separate entity like a partnership, corporation, or LLC, you can reorganize your personal liability for business debts with a Chapter 13. Further, you can do things with a Chapter 13 that you can’t in Chapter 7, such as:

Best yet, you’ll get up to five years for your plan.

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Bankruptcy: Definition And Facts

When a company has so much debt that it cant realistically keep up with its bills, it has several options moving forward. One of those options is bankruptcy.

According to the United States Courts, bankruptcy is a legal procedure for dealing with debt problems of individuals and businesses specifically, a case filed under one of the chapters of title 11 of the United States Code .

Looking past the legal jargon, bankruptcy is a process of dealing with extreme financial problems in bankruptcy court. This is rarely good for the company, its shareholders, or its debtholders.

When Should Your Business File For Bankruptcy

You should consider filing your business for bankruptcy if your business is financially struggling and your own personal assets are at risk of being taken by creditors, which depends on the type of business structure that you have. For example, if you own a sole proprietorship, you are the sole owner of your business and you are therefore liable for the business financial problems and your own personal assets could be at risk of seizure from creditors if your business fails.

Bankruptcy gets a bad rap, but its actually a great way to protect yourself from financial ruin if your business fails. Just because your business fails doesnt mean that you should lose all of your assets, so bankruptcy is a great option if you are at risk of your personal assets being taken by creditors.

That being said, if your business is registered as a limited liability corporation, also known as an LLC, you most likely dont need to file for bankruptcy. The liability is on your business rather than you as the business owner, so your own personal assets are not at risk of being seized. Creditors are not allowed to touch your personal assets when your LLC fails.

Instead, you can simply close your business and walk away, and there is no need to file for bankruptcy. Filing for bankruptcy in this case would actually be completely unnecessary. While its always best to settle your debts and pay your creditors when you can, if you are unable to do so, you are not personally liable.

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Benefits Of Chapter 7 Bankruptcy For Small Business Owners

If you are a sole proprietor, Chapter 7 allows you to wipe out both personal and business debts in a single bankruptcy case. If your business debt exceeds your personal debts, you won’t have to meet the income requirements of the Chapter 7 means test.

Also, you can use bankruptcy exemptions to protect your personal and business assets. So, in some casesfor instance, if you have a service-oriented business that doesn’t need much in the way of equipment or inventoryyou can continue to operate the business after wiping out business debts in bankruptcy. If, however, you can’t protect all of the property you need to run your business, the Chapter 7 trustee will sell the nonexempt property, which could put you out of business.

If your business is a corporation, or limited liability company , Chapter 7 bankruptcy provides a way to close down and liquidate your company in a transparent manner. When you file Chapter 7 on behalf of your business, it becomes the bankruptcy trustee’s responsibility to sell off the assets of the business and pay its creditors.

Keep in mind that Chapter 7 is rarely a good idea for partnerships because of the risk of the trustee paying debt with the personal assets of the partners. Keep reading for more drawbacks.

For more information, see Are You Personally Liable for Business Debts?

The Sole Proprietor And Chapter 13 Bankruptcy

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Only individuals can file a Chapter 13 bankruptcy case. So if your business is a partnership, corporation, or LLC you cannot file Chapter 13 on its behalf.

If you are a sole proprietor, you can include both personal and business debts in your Chapter 13 bankruptcy just like you can in a Chapter 7 bankruptcy. A Chapter 13 bankruptcy might be your best option if the sole proprietorship has income coming in. You might be able to keep the business going while paying a lesser amount on both personal and business obligations that are nonpriority unsecured debtsuch as credit card bills, utility payments, and personal loans.

You might run into a problem, however, if your sole proprietorship requires you to keep a lot of goods, products, or expensive equipment on hand. Although Chapter 13 bankruptcy allows you to keep your property, you still must be able to protect it with a bankruptcy exemption . Otherwise, you have to pay the value of the nonexempt assets in the three- to five-year repayment plan. For instance, if you owned $150,000 in nonexempt construction equipment, you’d need to pay your creditors $2,500 per month, plus any other required amounts, for five years.

Because many business owners are tight on cash, keeping all the property that you need might not be feasible if you don’t have enough coming in to pay a hefty monthly plan payment.

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Your Trustee May Sell Your Assets

You are able to keep:

  • ordinary household goods
  • tools up to a set amount used to earn an income and
  • vehicle with a value up to a set amount.

Your trustee can sell other assets including your house and property. You must not dispose of any property belonging to the trustee. You must declare any assets you have when you apply for bankruptcy and any you receive during bankruptcy.

How Bankruptcy Affects Investors

Clearly, nobody invests money in a company, whether through its stock or its debt instruments, expecting it to declare bankruptcy. However, when you venture outside of the risk-free realm of government-issued securities, you are accepting this added risk.

When a company begins bankruptcy proceedings, its stocks and bonds usually continue trading, albeit at extremely low prices. Generally, if you are a shareholder, you will usually see a substantial decline in the value of your shares in the time leading up to the company’s bankruptcy declaration. Bonds for near-bankrupt companies are usually rated as .

Once the company goes bankrupt, there is a very good chance you will not get back the full value of your investment. In fact, there is a strong possibility that you won’t get anything back at all.

As the SEC summarizes, “During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”

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Dealing With Your Vehicle

One of the forms you will file with the bankruptcy court is called the Statement of Intention. In this form, you tell the court what you plan to do with property that is securing a debt you owe, like real estate or a vehicle.

If you own your vehicle but are still paying on the loan, you have a few options on how to deal with it in Chapter 7 bankruptcy.

Reaffirmation

You can reaffirm the debt, keep your vehicle, and continue making payments. This means the debt will not be discharged and you will continue making monthly payments during and after bankruptcy. If you miss future payments the lender will have the right to repossess the vehicle and possibly try to collect on any deficiency between the balance you owe and the amount they get when selling the vehicle.

If you select this option in your Statement of Intention, your car lender will send you a reaffirmation agreement for you to complete and return. In some bankruptcy cases a reaffirmation hearing will be scheduled.

Surrender

If you choose to surrender your vehicle, then it will be repossessed and the debt will be discharged in your bankruptcy. Filers with high car payments they can’t afford often choose to surrender their car to get out of the debt.

Redemption

What Will Happen To My Corporation Or Llcs In Bankruptcy

How do you know when to file personal vs. business bankruptcy?

Corporations and LLCs are separate legal entities from their owners. This means that corporations and LLCs can own property, incur debt, and operate completely independently from their owners. The reason why these business entities are separate from their owners is to shield the owners from the liabilities of the business should the business fail . Unfortunately, most financial institutions and the Small Business Administration will require the owners of small corporations and LLCs to sign personal guarantees for any loans or debts given to the corporation or LLC, which circumvents much of the legal protection inherent in these types of businesses. This personal guarantee means that the guarantor becomes personally liable for the debt.

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What Happens To The Corporation Or Llc If I File A Personal Bankruptcy

If you file a Chapter 13, you can continue to operate your business during your Chapter 13 bankruptcy case with two caveats: First, your business must be generating net income for you and second, your Chapter 13 plan must distribute as much to your unsecured creditors as they would receive if you had filed a Chapter 7 bankruptcy case.

In a Chapter 7, the focus is on the net value of the company, or more precisely, the net value of the shares or membership interest held by the business owner. Recall that corporations and LLCs are separate legal entities. The owner does not own the assets of the business the owner only owns the shares or membership interest of the corporation or LLC itself. Therefore, we must consider the net value of the LLC or corporation when trying to determine what will happen to a corporation or LLC if the owner files bankruptcy.

If the corporation or LLC has a net liquidatable value and someone would be willing to purchase it, then the Chapter 7 trustee could do one of two things: sell the business assets, pay the businesss creditors and keep the rest to pay your personal debts or sell your shares or membership interest in your business to someone else.

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