News reports are constantly full of stories of large corporations filing bankruptcy, but a business of any size may be facing the challenge of how to handle their struggling finances. Generally, a business may choose to file a Chapter 7 or Chapter 11. Business owners must be strategic when making their choice, because a bankruptcy will not only affect their company, but could also affect the surrounding community and economy. When a business files Chapter 7, the business closes and all property and assets are liquidated to repay creditors. A Chapter 11 is a better option if the business has the momentum to keep running while negotiating with creditors to take care of their debt.
How to File?
Many factors must be taken into consideration when deciding which chapter of bankruptcy to file, including feedback from the bankruptcy court trustee. The trustee will look at all aspects of your situation to determine how a particular chapter would affect you, your employees, the surrounding community and economy, and other local businesses.
When a company closes its doors due to a Chapter 7, the employees will obviously no longer have their jobs. Depending on the job market, this could be a huge challenge or a relatively small change for them. Sometimes a Chapter 7 will lead to someone new purchasing and re-opening the company, sometimes employing the same people. Alternatively, a new business could take over the space the business held, and this new industry could revitalize the neighborhood and stimulate the economy, providing additional jobs. If the building or suite sits empty for a period of time, this could cause problems. A property that isn’t maintained could be vandalized or fall into disrepair, which could even lower surrounding home values.
If a company has steady income, but has very high debt or overhead, a Chapter 11 may allow them the flexibility to make some changes while continuing to operate. Sometimes the company can turn things around and begin making a profit, but the majority of companies eventually end up folding. Even if a company ultimately closes down, a Chapter 11 can buy the owner some time to provide employment for community members while preparing them to find new jobs. The owner may also have the freedom to connect with potential buyers for the company or give the landlord more time to find new tenants.
If a possibility, a Chapter 11 is usually most beneficial to the largest number of people and the economy. But a business owner, their attorney, and the court trustee will work together to make the best choice.
I’ve helped individual consumers, married couples, and business owners alike to take control of their finances and make a new start through bankruptcy. Before we do anything, we’ll look at the available alternatives and then come up with a solid plan. If you’re a struggling business owner and aren’t sure what to do next, let’s talk.