Bankruptcy is a term we hear all the time but don’t necessarily understand. We’ve put together a brief overview of business bankruptcy in the US to help you understand the meaning and consequences of corporate bankruptcy in today’s down market.
With today’s tough economic situation, we’ve been hearing more and more about business bankruptcies in the news. But what exactly is bankruptcy and what does it mean when a business says it’s filing for bankruptcy.
Bankruptcy is a legal filing that enables struggling businesses to resolve issues of insolvency. Generally caused by a lack of cash flow, filing a bankruptcy can be initiated by the business or by its creditors (called an involuntary bankruptcy). Once a bankruptcy case has been filed, the judicial system works to create a fair settlement between the business debtor and its creditors.
Most business bankruptcies fall into one of four categories, or types of filing:
- Chapter 7: Bankruptcy Liquidation—This type of bankruptcy dissolves the company, selling off its assets to pay all or part of its debts. Chapter 7 bankruptcy protection is generally utilized by companies with irresolvable cash flow or financial problems and by small, sole proprietorship businesses.
- Chapter 11: Bankruptcy Reorganization—This type of bankruptcy takes the corporation through a period of structural and financial reorganization with the goal of regaining profitability. Operations are typically streamlined to reduce costs, some assets can be sold off to satisfy creditors, and other changes are all options with this type of corporate bankruptcy. Chapter 11 bankruptcy filings are generally used by large and medium-sized corporations.
- Chapter 12 Bankruptcy: Bankruptcy for Family Farmers and Fishers—this specialized form of business bankruptcy is designed for family farming and fishing operations, and is used with less frequency than Chapter 7 and Chapter 11 bankruptcy.
- Chapter 13: Wage-Earner Bankruptcy—Frequently used in personal bankruptcy filings, this type of bankruptcy can also be used by sol proprietorship companies. Enabling them to repay debts over a set time period (usually three to five years), Chapter 13 bankruptcy allows the business owner to retain their assets.
If you’re considering filing for corporate bankruptcy, give us a call before making any final decisions. We can provide you with expert advice regarding the future of your company.
