Businesses that operate as corporations, partnerships or LLC's that are in financial trouble and need to file bankruptcy really only have two options: to liquidate or go out of business in chapter 7 bankruptcy, or to attempt to reorganize and stay in business by filing chapter 11 bankruptcy.
People, whether operating a business as a sole proprietorship or not, can also file chapter 11, but it is not usual. Most individuals file chapter 7 or chapter 13, although if they have an very large amount of debt and want to reorganize their finances, chapter 11 may be their only choice.
In the case of a business failure, where the business is not profitable and when chapter 11 is not feasible, chapter 7 is the logical choice. In chapter 7 a petition is filed with the bankruptcy court and an "automatic stay" or court order stops creditor collection actions. A liquidation trustee is appointed to gather and reduce to cash all the business assets. The resulting money is distributed to creditors as far as the money will go, according to a priority hierarchy contained in the Bankruptcy Code.
In chapter 7 cases concerning "entities" such as corporations and LLC's, there is no discharge of debts. The entity is eventually disssolved and is no more. This is unlike chapter 11 where if the chapter 11 plan is confirmed or approved by the court, it is a new contract, a new bargain with creditors, and it does receive a discharge of debts to the extent that they are not to be paid through the chapter 11 plan. This is also unlike chapter 7 cases involving individuals, that do receive a discharge of debts.
By filing a chapter 11, a business gets a breathing spell from creditors because of the bankruptcy court's automatic stay that stops all collection actions. And it can result in the successful reorganization of the business. But it does not relieve the business owners or officers of responsibilities. The business must be operated under supervision of the court and the U.S. Trustee's office according to the Bankruptcy Code and Rules. Payroll taxes and administrative expenses must be paid, adequate protection must be provided to secured creditors, and any use of cash collateral must be approved by the creditor in writing or a court order obtained allowing it by the Bankruptcy Court.
Also monthly operating reports must be filed on an accrual basis and quarterly fees must be paid to the U.S. Trustee's Office. Corporate officers must be prepared to attend necessary meetings and hearings, sometimes on short notice. Yes, filing and successfully reorganizing under chapter 11 can be time-consuming and costly. But if it means saving a valuable business or valuable property it can be worth it.
If your business is in financial trouble and chapter 11 may be your only answer, contact our office at 713-772-8037 or toll free 888-707-1233. Please don't delay and don't make important decisions under financial duress without at least consulting with bankruptcy counsel first to find out what options there are. A successful reorganization plan can allow you to shed unprofitable locations or divisions, repay secured debt under different, more affordable terms, pay I.R.S. debts over a long period of time, and reduce the amount of unsecured debt considerably, depending upon the facts of the case.