Many business owners or owners of corporate houses are at a loss when it comes to filing bankruptcy. They are not too sure about the right time to file bankruptcy and are rather confused about the process as well. So let’s throw some light on the issue.
A corporate house can file either Chapter 11 or Chapter 7 bankruptcy.
Chapter 11 bankruptcy: This is the option for a business owner if he has further plans to continue the business. With Chapter 11 bankruptcy the corporation will get a chance to offer a new repayment plan to the creditors. The creditors have the option to accept or reject the plan. With Chapter 11 bankruptcy, a part of the debt might be forgiven but there a lot of intricacies are involved.
Chapter 7 bankruptcy: If a company files Chapter 7 bankruptcy then its assets will be liquidated to pay off the debt. It is mandatory for the company to stop running its business as soon as Chapter 7 has been filed. A trustee sells the assets and divides the money raised from them among the creditors. In case of Chapter 7 bankruptcy, the company’s debts won’t be discharged.
Owners of corporate houses often get confused about the discharge issue in Chapter 7 bankruptcy. Many business owners cannot distinguish between personal bankruptcy and bankruptcy filed by corporations. It is to be clearly understood that bankruptcy filed by an organization is different from the obligations that the owners themselves might have. The owner of the company might be responsible for obligations like employee payroll tax fund. This needs to be paid off individually if the company does not have enough assets to clear these debts. It does not matter whether the debts of a corporation will be discharged in bankruptcy because they corporation will be sued by the creditors anyway. The creditors will try to get back money by using the assets (whatever is left) of the company. This does not involve the principals of the company.
Most business owners decide to file personal bankruptcy when the situation is critical. This may not be the right decision. This is because being a company owner, you have the certain responsibilities. This includes a fiduciary duty to the creditors in case the company becomes bankrupt. So if the owner files Chapter 7 bankruptcy for the corporation instead of personal bankruptcy then he can fulfill the obligations properly. In this case a trustee will be appointed which will sell the company’s assets and pay the creditors. Therefore the company won’t be sued by the creditors and neither will it have to appear before court multiple times stating that it is out of business and don’t have any assets. The business owners must consult an experienced bankruptcy attorney to understand their options.