A million and one plates are being spun at any time in a business. You have to keep everyone happy, keep payments flowing, and keep business growing. Sometimes, it’s impossible to keep up with everything, leading to financial or personal problems.
One of the main financial challenges a company can face is the decision on whether to file bankruptcy. It can be a scary and confusing title to want to take on. Should you declare bankruptcy? What does it even mean to be bankrupt? In this article, you’ll learn everything you need to know about bankruptcy and your business.
Why Does Bankruptcy Happen?
As mentioned, business owners have a lot of things to keep afloat at the same time. Sometimes, factors outside of their control lead to filing for Customer Bankruptcy. This could be down to the current economic climate, poor sales, overpowering debts, or myriad other reasons.
If you are a business owner, you will know that you often make purchases through debt and credit. Often, it’s hard to keep on top of all the financial outgoings, meaning they can stack up and become too expensive to manage. In this situation, when debt leads to dangerously low or no cash flow, you’ll need to file for one of the two below bankruptcy options.
Chapter 11 Bankruptcy
The most common form of bankruptcy a business files for is called Chapter 11 bankruptcy. In this form of bankruptcy, a company is given time to develop a plan of debt restructuring and reorganization, with the aim of exiting bankruptcy as a more profitable, successful company. In many cases, certain debts will be discharged or partially cleared, to give the company a second chance.
Chapter 7 Bankruptcy
Chapter 7 of the Bankruptcy Code is a little different. A Chapter 7 bankruptcy is often referred to as “liquidation.” This is because, in a Chapter 7 bankruptcy, a court-appointed trustee takes charge of the companies assets, liabilities, and property, often selling them to help repay the debt they owe to their company. Unlike a Chapter 11 bankruptcy, a Chapter 7 results in the cessation of all business activity, leading to the full closure of the business.
There is an important factor involved in either form of bankruptcy and that is the petition date. This is the date where a company facing a Chapter 11 bankruptcy first declares its bankrupt position. It is this date that marks the start of their bankruptcy process, meaning debts incurred before this date are the ones likely to be reduced and restructured.
After the petition date, companies must complete a few important tasks. Firstly, they must submit a plan to use current assets to pay immediate debts, staff wages, pensions, and more. Then, your company will have 120 days to submit a plan of reorganization.
Restructuring or Reorganizing
Most commonly, companies will be well aware that they are heading for bankruptcy, so plans for restructuring and reorganizing their debt will have been made in advance. They’ll work with various creditors and shareholders to work on this plan before entering bankruptcy, meaning the plan for exiting bankruptcy is already in place on their petition day.
Alternatively, if no plan and no communication is occurring between the debtor and creditors, owners may choose to sell their business. In many cases, another company within the same sector will strategically purchase the business and absorb it into its own company. In other cases, an investor may purchase the company in the hope of selling assets at a profit.
What About Staff?
In general, companies entering Chapter 11 bankruptcies will keep their staff on board and continue to pay them post-petition. Unfortunately, wages may be lost for staff of companies entering a Chapter 7 bankruptcy. Pension plans should be kept for those of Chapter 11 bankruptcies, but again may not be the same for those in Chapter 7. If your pension is lost due to the bankruptcy of a company, you can file a claim with the Pension Benefit Guaranty Corporation.
Intellectual Rights Post-Bankruptcy
Unfortunately, if your company holds patents, these may well be lost in a bankruptcy process. That is the case if you sell your company or parts of it to a bankruptcy estate. Intellectual rights are considered the property of whoever buys the company. However, if you restructure debt and keep your company alive, you will retain the rights.
These are the basics you need to understand when looking at bankruptcy for your business. It is never easy having to face these kinds of issues but, if tackled properly, you can come out the other side financially secure and stronger than ever.