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Bankruptcy Filings in American Law

Updated on December 21, 2017

Filing for Bankruptcy

A business is an enterprise that is run individually or in conjunction with others to trade or manufacture and then generate a profit. A business is also a company or an organization that also does sale, manufacture, and trade in goods or services. All these, when they run into financial trouble and are unable to pay their creditors, can be referred to as Bankruptcy business. Federal bankruptcy laws lay down the ground rules of those companies that go out of business or face insurmountable debt

It’s worth noting that Corporations, limited liability companies, and partnerships are legal entities. They are separate from shareholders or partners. Such entities can file a chapter 7 or chapter 11 bankruptcies directly.



Filing under Chapter 11

A bankrupt company or bankrupt business is a debtor. Such a bankrupt business can file under chapter 11 of the law with a view to reorganize its business and try and generate a profit again. K Mart, Enron, World com are some of the big names who have filed for bankruptcy under chapter 11. For bankruptcy business to file under chapter 11 the need of a lawyer is essential as chapter 11 bankruptcy is fairly complicated.

Proprietorships companies are ownership companies. In their cases, the proprietor must file bankruptcy, since the assets and the liabilities of the business are really belonging to the proprietor himself. The individual owner may file Chapter 7, Chapter 11 or 13 business bankruptcies. A problem that an owner of a bankruptcy business faces is whether to close business or start afresh after filing.

Reorganization

To such a question answers don’t come easily. Remember reorganization of a business can’t generate a market or increase revenue. However, reorganization can free up cash from servicing the old debt to permit current operations. In between Chapter 7 and Chapter 13, there is Chapter 11 that can provide a breathing space for the owners to sell the business as a going concern or its assets.

The results from this reorganization can help pay taxes or unpaid salaries. The bankruptcy can also then be converted to Chapter 7 or dismissed if bankruptcy protection is no longer needed. The court will link the dismissal of the case to payment to creditors from the sale proceeds. Bankruptcy reorganization when carried out under the aegis of Chapter 11 requires significant time and effort on the part of the owners and managers.

This is a difficult chapter and the requirements of interface with counsel, and negotiate with creditors is very important. It could also cost a pile of money. The court could accept a plea that, in exchange for the protection of the automatic stay the debtor provides will provide full disclosure of its financial condition to creditors and the court as well as operates as a fiduciary (trustee) for its creditors while the bankruptcy is ongoing. Entities that try reorganizations can fail. This is usually because they have no real plan to solve the existing problem. Businesses that do not require large capital and are really just an extension of the owner’s skills are the ones that it doesn’t need to reorganize.

For such bankruptcy business, the owners would be better advised to liquidate their business and starting all over again. Chapter 7, whether for the individual or a corporation, may be the best choice when the business has no future and there are no large assets or the debts are so large that restructuring the business would have no meaning.

Last Word

Individuals can get a reprieve from all debts that can be discharged and they also have a chance to restart again. A point to be noted is that Corporations differ from individuals and don't get discharges similar to individuals. Yet the fact is that a Bankruptcy under chapter 7 can be a help in an orderly manner and the trustee can exercise his power, which is available to the filer at no cost. To him. Creditors in Bankruptcy business proceedings have an assurance that they will be paid from the assets that are available. Payments will be as per the priority accepted.

The earlier management has an assurance that the assets the assets that are available will be used to clear payment of taxes towards payment of taxes which are the responsibility of the concerned individual

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