Options for Business Bankruptcy

Company owners investigating business bankruptcy in New York may be confused about what bankruptcy is and what type of filing is best for the organization. While filing bankruptcy can be complicated and should always be done with the assistance of a bankruptcy attorney, the basic concepts aren’t difficult to understand.

What Is Bankruptcy?

When a business or individual is unable to meet obligations to creditors, bankruptcy is a legal declaration of this inability. The purpose of the filing is to protect a business from action from creditors and allow the possibility to reorganize or liquidate so some or all of the debt can be paid. Personal and business bankruptcy is basically similar, though covered by different parts of the law.

Most business bankruptcy is voluntary, meaning the action is initiated by the business in debt. An organization that recognizes its inability to meet financial obligations files bankruptcy to get some breathing room while they decide how to approach the debts so they can be paid. In rare cases, the creditors can file bankruptcy against a debtor in an effort to recover a portion of unpaid debts. This is referred to as involuntary bankruptcy.

Bankruptcy Chapters

In the US there are six different types of bankruptcy, called chapters. Chapter 9 (municipal bankruptcy) is the chapter used to address municipal debts. Chapter 13 (wage earner bankruptcy) is a reorganization plan for consumers who have a steady source of income such as a regular job. Neither of these is used for businesses. It is also rare for businesses to file Chapter 12, designed for family farmers and fisherman, or Chapter 15, international bankruptcy.

Business bankruptcy is almost exclusively either Chapter 7 or Chapter 11. Chapter 7 bankruptcy is also known as liquidation. It is applicable to both businesses and consumers and is filed when the debtor has no possibility of repaying debts in full. Assets are sold off and as much of the debts as possible are paid out of the proceeds. Chapter 11 is a corporate reorganization that allows businesses to continue to operate while they pay off their creditors.

Liquidation or Reorganization?

The choice between Chapter 7 and Chapter 11 bankruptcy depends on how serious a company’s debts are. Chapter 7 spells the end of the company as a business entity. All assets will be sold off and the company will cease to exist. It is a desperate move but unfortunately sometimes necessary when an organization’s debts exceed their ability to pay.

Whenever possible, companies are advised to try for Chapter 11 reorganization. The company is able to keep operating while a debt restructuring plan is worked out. Many companies have emerged from Chapter 11 stronger than before and gone on to become powerful and profitable businesses.

The best advice for getting business bankruptcy in New York is to speak to a bankruptcy attorney. They can provide the advice owners need to decide which plan is best for their individual situation.