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How Bankruptcy Can Affect Your Business

When a business is unable to fulfill its financial responsibilities as and when they arise, the business is considered insolvent. Bankruptcy can affect the business if it business reaches a stage where the liabilities surpass the asset value; then the entity is deemed bankrupt.

Types of bankruptcy
Named after the relevant federal bankruptcy code, there exist four types of bankruptcies. A business can file for bankruptcy under two of them only.

  • Chapter 7 – A trustee is chosen on behalf of the business and he or she will gain control of all the assets of the entity. The trustee determines which assets will be sold in order to make payments to the creditors.
  • Chapter 11 – By filing under this a business is able carry on with its operations while it reorganizes its outstanding debt.
Both Chapter 7 and Chapter 11 enforce an ‘automatic stay’ on creditors, meaning it stops them from attempting to collect their debt without permission of the court.

Outcomes

If filed under Chapter 7;

  • You will lose control of your assets
  • Your business will be closed down and your employees will be discharged.
  • The trustee will decide which of your assets if any are exempt from the bankruptcy filing (e.g. clothes, furniture, books, etc.)
  • Funds collected through selling off the business’ assets are spread among the creditors as per the priority rules of the federal bankruptcy code
If filed under Chapter 11;
- You retain control of the business

  • The reorganization plan (e.g. merger, sale of assets, repayment of debt through future earnings, etc) prepared by you must gain majority approval of your creditors
  • You can cut down the debt by part repayment and discharging the rest
  • Your business can return to solvency by ceasing contracts which are troublesome and by re-scaling processes
Other

  • You will lose a considerable percentage of your business
  • Your credit score along with your credit history will be damaged for several years into the future
  • Humiliation faced
Which debt is discharged?

It is important to note that when the court does approve your bankruptcy petition and your business debt is discharged, there will still remain certain types of debt which are required to be paid up irrespective of your business position such as;

  • Debt owed to state organizations
  • Debt owed to family members through divorce, separation, child maintenance, etc.
  • Debt owed to persons due to injury by the owner of the business
  • Debt acquired after filing for bankruptcy
Article Summary
Filing for business bankruptcy is a serious matter which should only be initiated once all other solutions fail. Its positive impact may sometimes outweigh the negative impact depending on the status of the business.

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