The bankruptcy laws of the United States are there to protect individuals, businesses, and their creditors. Bankruptcy laws for businesses facilitate and enable reorganization of debt to pay off creditors without the business being destroyed or the orderly liquidation of assets to pay off creditors and divide up a failing business for others to buy up parts of and try to make successful. These laws therefore protect businesses and their owners and operators as well as creditors, consumers, and the economy in general.
All bankruptcy cases are presided over by federal courts of the United States. There are two types of bankruptcy for business owners, as established by federal law in 1978: Chapter 7 and Chapter 11. There is also what is known as Chapter 13 bankruptcy, but incorporated businesses cannot file under that type. Self-employed individuals, however, may file under Chapter 13.
For a business, Chapter 7 means filing a petition for bankruptcy which then results in there being a court-appointed interim trustee who gets control of all non-exempt business assets and accounts. This appointed and temporary trustee has broad power over the business during his appointed time. Finding unsecured financing, making managerial changes, and liquidating assets so as to pay off creditors while trying to keep the business from total failure are all within the scope of the trustee’s powers. Chapter 7 bankruptcy is the option for liquidation.
Chapter 11 is the bankruptcy option that has to do with reorganization. Under this option, the court oversees a flexible process by which the debtor business and its creditors work out payment arrangements to their mutual benefit and solution. The business’ principals maintain control of the business and remain in possession of its assets. The business’ management team goes on court record as being “debtor-in-possession”, or DIP, and there is no trustee appointed. However, if the creditors come to the conclusion that there is no viable solution being arrived at by the DIP and assets are continuing to be mismanaged, they can petition the court to intervene and appoint its own agent to replace the DIP. For the federal court to do this intervention, it must be satisfied with evidence that the creditors are correct in their assessment of continued mismanagement.
Businesses must file forms such as those documenting liabilities and assets with perfect accuracy and in the correct manner with the federal court. Failure to do this could result in the business losing its bankruptcy protection and the business could be totally lost. Therefore, if you own a business either alone or with partners and you deem that you may need to file for bankruptcy, you should consult a bankruptcy lawyer. Working in this capacity with you, the lawyer will be put on file by the court as a “Debt Relief Agent”.
If you own a business and you and any partners are considering filing for bankruptcy, consult a bankruptcy lawyer who has experience working with business owners.
Related Business Bankruptcy Articles: