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What should business owners know about bankruptcy?

On Behalf of | Jan 23, 2024 | Uncategorized

When businesses face financial hardships, bankruptcy often emerges as a viable option to either restructure debts or close a company in an orderly way. This is true for businesses of all types, including trucking companies, agricultural enterprises and others.

Understanding the basics of business bankruptcy and its implications is crucial for business owners considering this route. It’s a complex legal process that can offer relief but that also results in significant consequences.

What types of bankruptcies can businesses file?

For businesses, the most common types of bankruptcy are Chapter 11 and Chapter 7. Chapter 12 is another common type, limited to family farms and fisheries.

  • Chapter 11, often called reorganization bankruptcy, allows a business to continue operating while restructuring its debts.
  • Chapter 7 involves liquidating a business’s assets to pay off debts, after which the company typically closes.
  • Chapter 12 bankruptcy enables family farmers and fishermen to reorganize their debts and develop a repayment plan.

Each type of bankruptcy is unique, so understanding its ins and outs is critical for all business owners. In a nutshell, each type of bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.

How can bankruptcy affect operations?

Filing for bankruptcy can have a significant impact on a business’s operations. In a Chapter 11 or 12 bankruptcy, the company may continue to operate but must do so under the supervision of the court.

The business’s management retains control, but significant decisions, such as selling assets, entering into lease agreements or expanding operations, require court approval. On the credit side, a bankruptcy filing will significantly impact the business’s credit rating, making it more difficult and expensive to borrow money in the future.

Business owners should ensure they understand precisely how filing will impact their company before committing to an approach. Seeking legal guidance is a good way to get started.