BANKRUPTCY FOR BUSINESS
In general, Chapter 11 is for businesses to pay part of their debts and remain in business. Payment plan is proposed and approved by the Court. Individuals are eligible to file Chapter 11, however, only file if they face special circumstances. Chapter 11 is quite complicated, is labor intensive, and therefore very expensive. If an individual requires a payment plan type of bankruptcy, Chapter 13 is the usual alternative.
A business, whether a sole proprietorship, corporation or partnership can file a bankruptcy. A sole proprietorship, run by a single individual can choose any of the alternatives set forth above for individuals. It does not matter, for an individual, if the debts are “consumer” or “business” related.
Neither a corporation nor a partnership can file a Chapter 13 petition. The choices for these types of business entities are Chapter 7 or 11. Chapter 7 for a business is also called a liquidation proceeding. The assets, if any, of the business are liquidated to cash and the proceeds used to pay debts, in a priority order set forth in the Bankruptcy Code.
There are some circumstances, which would make a Chapter 7 an attractive alternative. The circumstances to be analyzed include the type of debts involved, and the assets of the business available to pay those debts. Also, the fact that a Trustee would be appointed by the Court to handle the liquidation. The business and business owner would not face the expense and aggravation of the liquidation. The Trustee does get commissions and fees for his/her services.
In the normal course, Chapter 11 is the most complex and expensive of bankruptcy proceedings. It is filed by a business, which is faced with high debts, and is being harassed by its creditors, perhaps facing lawsuits or of being shut down, for example, by tax authorities.
The biggest benefit of any bankruptcy is the automatic stay (injunction) which comes into play immediately upon the filing of the petition. Virtually all creditors, including governmental agencies, such as tax agencies, are stopped dead in their tracks by a filing. Even if an asset has been seized already, it may be possible to get it back.
A business in Chapter 11 remains in complete control of its business, free of the harassment by creditors. There are reporting requirements to the US Trustee, an administrative agency charged with overseeing the operation of a business within the requirements of the law. The oversight is not on site, but through the financial reports required to be filed monthly by the Debtor.
The Debtor has strong powers in Chapter 11. For example, it can get relief from a contract or lease it finds burdensome. It can seek financing. It can use the Bankruptcy Court to collect monies owed to it. This can and usually is much faster than trying to collect through the State Courts.