If your business is in trouble, you may need to file for bankruptcy. The exact benefits and consequences of bankruptcy are somewhat different from chapter to chapter.
Many businesses that are facing insurmountable debt opt for Chapter 7, or liquidation bankruptcy. The idea behind this chapter is to take all of your nonexempt assets and sell them to meet your debt obligations, or as many as possible. The bankruptcy trustee will collect your assets, appraise them and sell them. Then, the trustee will rank your creditors in a specific way and pay them off in order.
Some of your creditors may go partially or fully unpaid. Once all of your qualifying assets have been sold, most of your remaining debts are generally discharged by the bankruptcy.
However, bankruptcy does not extinguish liens on property or discharge certain types of debt. For example, you generally can’t obtain a discharge of recent tax debts.
Moreover, there are certain circumstances under which you may be personally liable for your business’s debts or losses. A business bankruptcy will not prevent this
The automatic stay of debt collections
Filing for bankruptcy places your creditors on hold. They can no longer pursue most collection of your debts and must communicate with you through your bankruptcy attorney. This can give you some short-term relief from collection actions.
The longer-term solution is the debt relief granted when your assets have been sold to cover your qualifying debts. Be aware, however, that secured creditors can retain the right to repossess any assets that remain.
You cannot settle your debts outside the bankruptcy process
In bankruptcy, creditors are ranked so that those with more secure claims are paid first. Secured creditors (those to whom you have given collateral) generally come first, and ordinary, unsecured creditors generally come last.
Because this process is laid out in the law, you cannot go around it and pay some creditors preferentially. Once you are contemplating bankruptcy, you should stop paying all of your creditors at once. You should also avoid transferring anything of value to friends or relatives, as this could be considered bankruptcy fraud.
Beware of personal liability
There are certain circumstances in which you could be held personally liable for business debts. This depends in part on which type of business entity you are operating. For example, a sole proprietorship or general partnership will not shield the owners from debts or liabilities of the company. Another common example is payroll taxes. In many cases, business owners can be held responsible for any payroll taxes that were left unpaid.
If your business is facing an insurmountable amount of debt, Chapter 7 bankruptcy may be for you. To understand what will happen in your particular case, talk to a bankruptcy attorney.