What Happens When You File for Bankruptcy as a Business?

Posted on Thursday, February 1st, 2024 at 9:00 am    

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Running a business has always been a challenging endeavor. However, in the years since the pandemic began, economic pressures have caused many businesses to go into debt in ways that have made operations feel unsustainable. If you do not know how your business will continue repayments to your creditors, you might be thinking of filing for bankruptcy.

While filing for bankruptcy can offer the debt relief you are looking for, it is crucial to be aware of its consequences. Learning what happens when you file for bankruptcy can help you create a thorough and clear strategy as you make your way back toward financial health.

Types of Bankruptcy for Businesses

What happens to debt when you file for bankruptcy? The answer will differ depending on which type of bankruptcy you declare. There are two main types of bankruptcy that businesses typically file: Chapter 7 and Chapter 11. The kind of bankruptcy you file will depend on factors like your business structure, assets, debts, and goals for the future of your company.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves shutting down the business entirely to pay off debts. If you do not foresee a path to profitability, Chapter 7 may be the right choice.

The process starts with a means test comparing your income and expenses, and you may need to undergo credit counseling. Once you file the petition with the bankruptcy court, an automatic stay goes into effect, and creditors can no longer contact you to collect debts.

The court will appoint a trustee to take control of your business assets, which they will sell to pay off as much of your debt as possible. Any remaining eligible debts will then be discharged, relieving you of the obligation to pay them. At this point, your business will be shut down, and the bankruptcy case will be complete.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy, on the other hand, allows you to restructure your debt while continuing business operations. If you believe your business could return to profitability with some financial reorganization, Chapter 11 may be appropriate.

As with Chapter 7, you will need to complete credit counseling before filing. You will also need to provide the court with detailed financial records. Once your petition is filed, the automatic stay provides relief from debt collection efforts.

You will then create a plan proposing how to repay your debts over time. Your creditors and the court must approve this plan. If the plan is successful and you make all required payments and progress reports, you can eventually emerge from Chapter 11 with a healthier, restructured business. However, this process can take years and cost tens of thousands of dollars in legal and accounting fees.

Other Debt Relief Options to Consider

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While declaring bankruptcy can be helpful, it is generally considered a last resort. Given the cost, time, and complexities involved with filing for bankruptcy, it is wise to explore other avenues first, if possible:

  • Debt settlement – You may be able to negotiate with creditors to accept less than the total amount owed, either in a lump sum or over a payment plan. While this will impact your credit, it avoids bankruptcy.
  • Debt consolidation – Taking out a new loan to consolidate multiple debts into a single monthly payment, ideally at a lower interest rate, can make handling debt more manageable.
  • Selling assets – Liquidating assets yourself to pay down debts can help you avoid losing control of the process in bankruptcy proceedings.
  • Reworking your budget – Cutting expenses, boosting sales, and otherwise improving cash flow may let you pay off debts over time without needing bankruptcy protection.

Before deciding, discuss your situation and options thoroughly with a knowledgeable business bankruptcy lawyer. They can review the likely outcomes and impacts of filing for bankruptcy in your specific case.

Considering Filing for Bankruptcy in North Carolina? Call Bradford Law Offices Today

Declaring bankruptcy is one of the most significant decisions any business owner can make. As such, it is essential to work with an experienced Raleigh business bankruptcy attorney who can advise you on your options and help you understand what will happen next.

The seasoned legal team at Bradford Law Offices has spent nearly 30 years helping businesses through the bankruptcy process, and we are ready to put our skills and knowledge to work for you. Call us today at (919) 758-8879 or contact us online to learn more about how we can assist you.

Written By: Danny Bradford Last Updated: May 14, 2024