The main paths under the Bankruptcy Code
Business bankruptcy law is federal, and cases are heard in the bankruptcy courts. Chapter 7 is a liquidation in which a trustee takes over, sells the assets, and distributes the proceeds, and a corporation or LLC does not receive a discharge of its debts in that chapter. Chapter 11 lets a business keep operating while it reorganizes, sells assets, or both, and Subchapter V offers a streamlined version for smaller businesses within its eligibility limits. Chapter 13 is available to individuals, not companies, so a sole proprietor may use it as a person while a corporation or LLC cannot. Because a sole proprietorship is not legally separate from its owner, the owner's own bankruptcy usually covers the business debts as well.
What bankruptcy does and does not change
Filing creates an automatic stay that generally stops collection actions against the company, but in most cases it does not protect owners who personally guaranteed loans, leases, or credit lines. Some unpaid payroll taxes can become the personal responsibility of the people who controlled payments, whatever happens to the company. A trustee or the debtor may be able to recover certain payments made before the filing, including transfers to insiders, and the reach-back period can be longer than many people expect. Secured lenders usually keep their rights in collateral. If the business or its owner has filed before, the stay may be limited or may not arise in the usual way, so prior filings should be disclosed at the outset.
Options outside the bankruptcy court
Bankruptcy is not the only tool. Some businesses negotiate workouts with lenders, sell the company or its assets outside court, or use a state-law process such as an assignment for the benefit of creditors, in which assets are transferred to a fiduciary who liquidates them. Receiverships and lender foreclosure on collateral are other routes, usually started by creditors rather than the business. We start by reviewing the debts, the collateral, the guarantees owners signed, and the company's cash position, and then compare what each option would accomplish and at what cost. The right path depends on whether the business has a future worth preserving and on what the owners and key creditors need.
