How To File Bankruptcy As A Small Business
Thinking through the pros and cons of small business bankruptcy and deciding if it is the right option for you is something that you must give careful thought and consideration to.
Once you decide you want to proceed with bankruptcy, however, initiating the process is pretty simple. Sole proprietors can file on their own, but other businesses need an attorney to file. And even if youre a sole proprietor, we recommend hiring a business bankruptcy lawyer, because the rest of the process of filing bankruptcy for a small business can be lengthy.
How does business bankruptcy work?
The commencement of bankruptcy is actually simple, Jackson says, with a form that must be filed, along with payment of a filing fee. But, after the case is opened, the company must file very extensive disclosures with the court. After that, management must become accustomed to making its secrets public and seeking approval of every move.
This being said, here are the basic steps required to file business bankruptcy:
The Us Trustee Or Bankruptcy Administrator
The U.S. trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The U.S. trustee is responsible for monitoring the debtor in possession’s operation of the business and the submission of operating reports and fees. Additionally, the U.S. trustee monitors applications for compensation and reimbursement by professionals, plans and disclosure statements filed with the court, and creditors’ committees. The U.S. trustee conducts a meeting of the creditors, often referred to as the “section 341 meeting,” in a chapter 11 case. 11 U.S.C. § 341. The U.S. trustee and creditors may question the debtor under oath at the section 341 meeting concerning the debtor’s acts, conduct, property, and the administration of the case.
In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.S. trustee program is administered by the Department of Justice. For purposes of this publication, references to U.S. trustees are also applicable to bankruptcy administrators.
Trustees Liquidation Of Assets In A Chapter 7 Bankruptcy
As mentioned above, the Trustee will collect all assets of the business including inventory, equipment, other tangible and intangible property, rights, and/or entitlements and liquidate any such property to satisfy creditor claims filed in the case in order of their priority. The Bankruptcy Code considers the entitys owners, the equity security holders, as the lowest priority group. Thus, only if all claims of creditors are satisfied in full, any remaining assets will be distributed to the owners.
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What Will Happen To My Stock Or Bond
A company’s securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. However, even when a company is delisted from one of these major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets. There is no federal law that prohibits trading of securities of companies in bankruptcy.
Note: Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss. Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company’s plan of reorganization will cancel the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company’s assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are usually subject to substantial dilution.
What Is The Liquidation Process
The liquidation process is typically affected by the type of bankruptcy governing the process. The two types of bankruptcies available for company liquidations are Chapter 7 and Chapter 11 bankruptcies.
- Chapter 7 bankruptcy: In a Chapter 7 bankruptcy, the court appoints a trustee who oversees the sale of the debtors assets into cash for paying among creditors.
- Chapter 11 bankruptcy: A Chapter 11 bankruptcy allows the debtor more flexibility than a Chapter 7 bankruptcy. The debtor can reorganize and set a plan, instead of going straight into liquidation.
A Chapter 11 bankruptcy often offers the debtor better economic conditions for the compulsory liquidation than those from a Chapter 7 bankruptcy. Additionally, creditors may play a more active role in the liquidation in a Chapter 11 bankruptcy than in a Chapter 7 bankruptcy.
Regardless of being governed by a Chapter 7 or Chapter 11 bankruptcy, the liquidation process involves filing several forms, paying applicable court fees, and following bankruptcy court guidelines.
If no bankruptcy is involved, the liquidation process is closer to a standard sale, in which the buyer and seller have to agree on the sale terms.
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How Can You Find Out If A Business Filed For Bankruptcy
Bankruptcy forms are public, so any individual, lender, or other business can find out if your company has ever filed for bankruptcy. Of course, this also means that you can research to determine if other businesses have filed for bankruptcy. To do so, you can sign up for PACER, the online-based federal court document system, and search bankruptcies records.
Additionally, you can contact the applicable local clerks office and review the bankruptcy documents filed there as well.
How Chapter 13 Bankruptcy Works
Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who have enough left over each month to pay back at least a portion of their debts. The amount you’ll repay will depend on how much you earn, the amount and types of debt you owe, and how much property you own.
Typically, Chapter 13 bankruptcy is for debtors who:
- don’t qualify for Chapter 7 but need debt relief to lower credit card payments, stop litigation, prevent a wage garnishment
- have nondischargeable debts such as alimony or child support arrears that they’d like to pay off over three to five years, or
- have fallen behind on a house or car payment and want to get caught up on missed payments and keep the property.
In Chapter 13 bankruptcy, the trustee doesn’t sell your property. However, you must pay creditors an amount equal to the nonexempt property value. In exchange, you pay back all or a portion of your debts through a repayment plan. The amount paid will depend on your income, expenses, and type of debt. Other benefits exist, too, such as the ability to strip wholly unsecured junior liens from your residence.
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Difference Between Chapter 7 And Chapter 11 Bankruptcy: Yahoo U
The retail apocalypse struck again this week with Pier 1 Imports announcing massive store closures and rumors spread that the company could be headed for bankruptcy. Pier 1 is shutting nearly half of its 942 stores and Bloomberg reported that the retailer drafted a bankruptcy plan and presented ideas for a smaller version of the retailer to some creditors.
Companies filing for bankruptcy often turn to two options: Chapter 7 and Chapter 11.
In Chapter 7 bankruptcy, most assets are liquidated. Outstanding leases get cut off and in some cases the loan balance will be discharged . A trustee would be appointed to liquidate other assets like trademarks and intellectual property. Cash raised from those sales are then paid out to the lenders. In many cases, Chapter 7 results in full liquidation of the company.
But what if a company wants to clear some of the debts but wants to leave assets, at least some of it, to have maybe one more shot at a comeback? They could choose Chapter 11 bankruptcy, or reorganization.
In a re-org, the company would submit a debt repayment plan to the bankruptcy court. This plan includes ways to pay down all the debts that are due. The plan has to include steps the company is willing to take to pay back creditors. In Chapter 11, an executives personal assets are not at risk, although the value of any stock held would obviously be affected.
Stages Of Bankruptcy Of A Legal Entity And Its Liquidation
Liquidation of a legal entity due to bankruptcy consists of the following procedures:
- observation
- bankruptcy proceedings
- amicable settlement
Observation is the first stage that is carried out to save the property of the debtor enterprise. At this stage, should be analyzed financial condition, prepared the requirements of creditors and conducted their first meeting. Observation is introduced as a result of the consideration by the arbitral tribunal of an application declaring the company insolvent. This stage should be completed within 7 months from the date of filing the application to the court. Further, the steps are as follows:
- cases related to the recovery of funds shall be suspended at the request of the creditor
- property recovery shall be suspended, including the removal of arrests and restrictions that are related to the values of the debtor
- satisfying the requirements of the members of the debtor company for operations with shares in property in connection with the withdrawal from the composition of its founders is not allowed
- termination of monetary obligations by offsetting a counterclaim of uniform demand is not allowed if the order of satisfaction of the creditors claims is violated
- the payment of dividends, income, as well as the distribution of profit between members is not allowed
- penalties, fines and other sanctions for failure to fulfill monetary obligations and payments, with the exception of current ones are not charged.
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What Happens To The Company
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Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the “debtor,” might use Chapter 11 of the Bankruptcy Code to “reorganize” its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.
Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to “liquidate” the company’s assets and the money is used to pay off the debt, which may include debts to creditors and investors.
The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.
Chapter 1: Business Reorganization
For a business, bankruptcy does not necessarily mean ruin. If it did, there would be three fewer major air carriers , two fewer car manufacturers , and no Marvel Universe.
Chapter 11 filings which surged during the coronavirus shutdown in 2020 allow troubled businesses to protect themselves from creditors while they reorganize their business operations, debts, and assets.
If all goes well, the business re-emerges a few years later oftentimes smaller, sleeker, more efficient, profitable and creditors have enjoyed a more satisfactory return than they would have if the business ended operations and was liquidated.
Sometimes, however, Chapter 11 buys only time. The reorganization plan fails, and liquidation results. The 2011 demise of Borders Books, once the nations No. 2 bookseller, is a prominent example.
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Chapter 1: For Family Farmers And Fishermen
Similar in design and intent to Chapter 13, Chapter 12 provides family farmers and family fishermen who meet certain criteria to propose a repayment plan lasting from three to five years.
However, anticipating the seasonal nature of many small farming and fishing operations, Chapter 12 allows more flexibility in structuring periodic payments.
Chapter 12 helps multigenerational families involved in the business in which the parents have guaranteed debt.
Family farmers or fishermen considering Chapter 12 should be aware of several changes that came about in 2019 regarding the sale of assets. Its a good idea to review these changes with an attorney or an accountant trained in bankruptcy law.
Who Can File A Plan
The debtor has a 120-day period during which it has an exclusive right to file a plan. 11 U.S.C. § 1121. This exclusivity period may be extended or reduced by the court. But in no event may the exclusivity period, including all extensions, be longer than 18 months. 11 U.S.C. § 1121. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. The U.S. trustee may not file a plan. 11 U.S.C. § 307.
A chapter 11 case may continue for many years unless the court, the U.S. trustee, the committee, or another party in interest acts to ensure the case’s timely resolution. The creditors’ right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.
Only the debtor may file a plan in a subchapter V case. 11 U.S.C. § 1189.
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What Is The Difference Between Chapter 7 And Chapter 13 Bankruptcy
If you do ultimately decide to file, one of the first big decisions you’ll make is whether to file Chapter 7 or Chapter 13 bankruptcy. These chapter names refer to sections of the U.S. Bankruptcy Code where it’s outlined how, exactly, your debt is taken care of in each process. The choice to file one or the other determines whether you’ll be put on a debt repayment plan or if your debts will be settled with the property you own. If you find yourself at a crossroads, start here to get a grasp on what’s ahead.
What Formal Restructuring Proceedings Are Available In Your Jurisdiction And What Are The Benefits And Drawbacks Of Each
Under the Bankruptcy and Insolvency Act , an insolvent debtor may restructure by issuing a notice of intent to make a proposal. The filing of a notice of intent triggers an automatic 30-day stay of proceedings against all of the debtor’s creditors, which may then be extended in increments of 45 days for a maximum of six months from the date of the stay of proceedings. The notice of intent process allows a debtor to make a proposal to its creditors which would allow it to continue operating as a going concern and avoid insolvency. If the proposal is rejected by the creditors, the debtor is automatically deemed to have made an assignment in bankruptcy.
Under the Companies’ Creditors Arrangement Act , which applies to debtors subject to at least C$5 million of liabilities, a debtor may restructure its business under the supervision of a court-appointed monitor. A CCAA proceeding provides greater flexibility for restructuring, as there are no prescribed timelines for completion of the process under the statute. The skeletal nature of the statute allows for creative resolution and workouts that would not otherwise be possible under the BIA. In CCAA proceedings, debtors remain in possession of their assets. CCAA proceedings tend to be more expensive than other formal proceedings, due primarily to the size of the debtor that is typically involved, as well as the larger number of professionals usually needed and the higher level of court involvement and scrutiny.
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Revocation Of The Confirmation Order
Revocation of the confirmation order is an undoing or cancellation of the confirmation of a plan. A request for revocation of confirmation, if made at all, must be made by a party in interest within 180 days of confirmation. The court, after notice and hearing, may revoke a confirmation order “if and only if the order was procured by fraud.” 11 U.S.C. § 1144.
Where Can I Find More Information
The Company. – Contact the investor relations department in the company’s home office. They can give you more information on the bankruptcy proceeding, including the name, address, and phone number of the court handling the bankruptcy.
Your Broker. – If you can’t find information in the newspaper or the library, or you haven’t received any correspondence from the company, call the person who sold you the investment.
The SEC. – Companies file regular reports with the SEC in a computer database known as EDGAR. For example, a company declaring bankruptcy will file a form 8-K that tells where the case is pending and which chapter of bankruptcy was filed. You can access EDGAR through your computer at: If you don’t have access to a computer, your public library may have a computer you can use. You can also request a copy of Form 8-K, or any other reports that the company files with the SEC, see “How to Request Public Documents“. You might also be able to get copies of SEC filings from your full-service stockbroker, or the company itself.
U.S. Trustee at the Department of Justice. – The U.S. Trustee has broad administrative responsibilities in bankruptcy cases. Check the U.S. Trustee’s website, your local telephone book, or the public library for the field office closest to you, and contact them for information on the status of the bankruptcy.
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