So how exactly do you know when it’s time to call it quits on your ailing business and file a Bankruptcy petition? Unfortunately, there’s no One True Answer to this question. It’s going to depend on the value and type of the company’s assets, the cooperation (or lack thereof) of company creditors, and the willingness of management to oversee the entire process.
Sometimes, companies go out of business without the need to file for bankruptcy. They simply liquidate their assets and wind down operations. But, since creditors have a right to recover claims against the assets of a company, bankruptcy is sometimes necessary. Of course, that becomes a moot point if the business has no assets. It’s not very productive to sue a company that has absolutely nothing.
Filing for bankruptcy protection can protect assets from creditor action, freeing the business to use them for the payment of taxes and employees if the company is still viable enough to try and stay afloat. In that case, filing for Chapter 11 (Reorganization) Bankruptcy is probably the best bet, since it doesn’t require that the company liquidate all of its assets. Both Chapter 7 and Chapter 7 provide an automatic stay, which forces creditors to cease collection attempts while the case goes through the Bankruptcy Court.
Under Chapter 11 Bankruptcy, the plan must be affirmed by a vote of the creditors, divided into classes based upon the type and amount of their claims. If the debtor fails to gain enough creditor votes to confirm the reorganization plan, the debtor can try to force the plan on the creditors by meeting specific statutory tests. Unfortunately, only about 10% of all Chapter 11 reorganizations prove successful. Businesses who hope to make it to that 10% need to seek out expert legal advice from bankruptcy attorneys, and be completely realistic at every stage of planning the reorganization.
Under chapter 7 Bankruptcy, a Court-appointed trustee liquidates all company assets, then pays all administrative and legal expenses associated with the bankruptcy before paying the remainder to creditors. Secured creditors will have their collateral returned to them, and are then categorized with the unsecured creditors for any claims above the amount of that collateral. Bondholders and other unsecured creditors must be notified of the Chapter 7 Bankruptcy, and should file appropriate claims in order to receive payments should there be enough money left over to pay them. Businesses aren’t required to notify stockholders of the Chapter 7 case since there’s usually not enough left to repay their investment, but if the creditors have actually been paid in full, stockholders will be notified and allowed to file claims for any remaining funds.