Filing bankruptcy is a decision not to be taken lightly especially for a business. You have several options when facing a bankruptcy filing, unless non-cooperative creditors force you into filing. If a creditor is willing to work with you, you can arrange for lower payments until the business starts doing better, or you can choose other options. Once you read about bankruptcy, it is best to have an attorney explain the different types of bankruptcy and their finer points.
If you are considering bankruptcy because of a decline in business, assess the problem first. Determine whether the decline in business should be temporary or if it is permanent. If the problem is because of staff issues or the economy, bankruptcy might not be the best option for you. If the problem is more deeply seated, such as a problem with the cost of your product or services, you might consider bankruptcy.
A problem with the cost of a product will not go away. You cannot offer a product for less than you paid for it, nor can you realistically offer a product for the same price you paid for it. If people are not purchasing your products or service because of cost, and you cannot find a different supplier, you either have to stop offering that product or service, or may have to file bankruptcy.
If you have a short-term problem, you may be able to work out a deal with your creditors. They would rather have the chance to be paid rather than see their investments go down the drain or get cents on the dollar in bankruptcy court. You should contact the creditor as soon as you have a problem and explain to them that you are having trouble. Explain the circumstances and your plan to rectify the problem. You could ask for lower payments, for payments to be moved to the back of the loan, or for forgiveness on a payment or two.
Once you file a petition for bankruptcy with the federal bankruptcy court, the court will assign a judge and a trustee. The court and/or trustee schedules a meeting of creditors. A meeting of creditors is often referred to as a 341 meeting because the rule governing the meeting falls under section 341 of the bankruptcy code. Whether you file a Chapter 7, 11, 12 or 13, you must attend a 341 meeting. You are required to attend the 341 meeting, but it is optional for creditors.
After the 341 meeting has been scheduled, the trustee will contact you with a list of documents required. You should make a copy of all the documents and turn the copies in to the trustee. Never give the trustee originals. You will not get them back.
You will be asked to provide, at a minimum, bank statements, vehicle titles, property leases, notes and mortgages, leases for leased business equipment, state tax returns, and federal tax returns. You may also be required to submit business records, employment tax returns, worker’s compensation returns, and other business financial documents.
If a creditor shows up at the 341 meeting, the creditor or its representative may question you regarding your finances. The trustee may question you regarding your finances. If the trustee thinks there might be some type of illegal activity with your business, he may require the Department of Justice to become involved in the case.
If the Department of Justice becomes involved, you will have to provide financial information to its representative. This rarely happens with typical businesses and business dealings, but if you worked with mortgages or had other real estate dealings, or if it has been noticed that you were not paying employees, you may see the Department of Justice.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy falls under Chapter 7 of the bankruptcy code, which outlines the rules for liquidation. A business or an individual may file a Chapter 7 bankruptcy. If you file Chapter 7 as a business, the business gets completely liquidated and closed. During the bankruptcy process, the trustee will review your schedules to determine whether you have assets that must be sold. If assets are available to be sold, the trustee will require that you either turn the assets into the court so that the court may auction them off, or, if you want to keep some or all of the assets, will require that you make payments to the court. The payments equal the current value of the assets.
For example, if you have a truck that you use for the business, but you prefer to keep the truck, the bankruptcy court will get the value from the Kelly Blue Book. Once the value has been determined, the court will request that you turn in the truck or make payments to the court for the value of the truck. If the truck is only worth $1,000 on the Kelly Blue Book, and you keep it, the court collects $1,000 from you to pay to your creditors.
A Chapter 7 bankruptcy may last from a few weeks to months, depending on your assets, whether the Department of Justice pays you a visit, or other things, but generally, if you do not have assets or the assets are not worth anything, you receive a discharge rather quickly.
Chapter 11 bankruptcies are reserved for businesses or individuals with a lot of property. Once you file a Chapter 11, you will receive a notification with the name of your judge and trustee. There are several additional requirements for a Chapter 11 when compared to a Chapter 7. A Chapter 11 is a reorganization. The business may stay open. You must provide a monthly accounting to the trustee. You must also pay a monthly fee to the trustee. The fee is used to pay your creditors and the trustee’s fee. The trustee’s fee is a percentage of the amount you must send in monthly to pay your creditors.
In a Chapter 11 bankruptcy, you generally pay cents on the dollar for your bills. A Chapter 11 usually takes a few years to resolve. The initial filing of the petition and the Chapter 11 Plan, and the 341 meeting goes quickly, but you must pay the trustee a certain agreed upon amount to your creditors. This is the part that may take several years.
You only receive a discharge after all payments have been paid. This depends on how many assets you have, what you decide to keep, what you decide to sell to help with the amount due, and how much you can pay each month. Once the bankruptcy has been discharged, the creditors listed in the bankruptcy can no longer attempt to collect from you, unless you open a new account with them and default on the new account.
The outcome of a Chapter 11 is a consolidation, a reduced debt load, and a reorganized business.
Chapter 12 bankruptcy is reserved for a family farmer or fisherman with regular annual income. It works like a Chapter 13 to provide debt relief to farmers or fishermen. Once the petition has been filed, the debtor files a plan to pay back creditors a certain amount over a certain period of time, usually three years. The court may sometimes agree to a five-year plan. The outcome at the end of the three years is a discharge of the partially paid debt.
For example, if you owe credit card number one $19,000, have a loan on farm equipment for $30,000 and owe hospital bills from the day your hand got cut by a baler that total $5,000, and only the equipment is secured, you may end up paying cents on the dollar for the credit card and the hospital bills. During the repayment time, you will also pay any arrearages on the equipment loan, though you may not pay the total arrearages, if the creditor agrees.
During the bankruptcy, you must continue paying the regular payments on the secured equipment. When the bankruptcy is discharged, you will not owe anymore on the credit card or the hospital bills, even though you only paid a small percentage of the amount due. Of course, you will not have that credit card to use anymore because the account is closed. You get to keep all of your assets in a Chapter 12 as long as you make the monthly payments to the trustee.
One other option for individuals is a Chapter 13 bankruptcy. This is a reorganization of personal debts. Some companies that are sole proprietors may use a Chapter 13, although if you are any other entity, you must choose a Chapter 7, 11 or 12.
In a Chapter 13, you must also file a petition and a plan. As in a Chapter 11, the plan shows how you will allocate funds toward liabilities you are behind on and how much you will pay to the trustee each month for those liabilities. If you want to keep your home or any other secured assets, you must pay the full amount of the payment each month, although you may pay cents on the dollar for arrearages.
Before making a move, assess your situation. Contact your creditors. If you want to keep your business and you can work out a solution with the creditor, this is the best option.
If you don’t want the business or if your creditors won’t work with you, research the different business bankruptcy types but don’t go into it blindly. Read about the different bankruptcy options and get at least two opinions from attorneys about the types of bankruptcy before making your choice.
- Author's own knowlege and experience in the paralegal field.
- Photo: Messy Desk by Elliott Pesut under CC-BY-SA 2.0
- Middle District of Florida: Bankruptcy Basics
- Photo: Tallahassee Courthouse by Ebyabe under GNU Free Documentation