Bankruptcy and business: Three possible paths

Businesses struggling to make ends meet can consider these three options.

Businesses considering bankruptcy generally have three options: Chapter 11, Chapter 13 or Chapter 7. The petition chosen will impact the future of the business. In two cases, the business may be able to restructure and re-enter the market positioned for success. The other focuses on winding down business operations.

Chapter 11 bankruptcy and business: The road towards continued operations

A petition for relief through a Chapter 11 bankruptcy is generally structured to allow companies to continue operations. This option involves the filing of a written disclosure statement and plan of reorganization with the court. The statement includes information about assets, liabilities and other business affairs. It is intended to provide enough information for creditors to determine if the proposed plan for reorganization is viable.

Creditors then vote on the plan. The court will review the disclosure statement and take the votes into consideration before deciding to accept or reject the proposal.

This form of bankruptcy is available for large and small businesses alike. Toys "R" Us Inc is the most recent large retailer to pursue this option. It is positioned to emerge from bankruptcy with 1,600 stores still in operation. A recent piece in Reuters discussed this case, noting the retailer is likely poised for a successful reentry to the marketplace for two reasons - the support the business received from creditors and vendors. The creditors were supportive during the bankruptcy process. In this case, it will likely work in their favor as the retailer was able to make a strong case that it could repay the creditors in this scenario. The vendors were also supportive. This role was apparent when they adjusted their payment terms, essentially pushing back the due date.

Chapter 13 bankruptcy and business: A budget friendly alternative

Small business owners may find another option more viable: a Chapter 13 bankruptcy. This option is generally available for individuals who operate an unincorporated business or are self-employed. The process is similar to that used for Chapter 11 above. It involves filing Official Bankruptcy Forms with the court that include a statement of financial affairs and various schedules.

Chapter 7 bankruptcy and business: The road towards dissolution

This option for relief is available for businesses that are no longer able to continue operations. It involves liquidating assets and using the proceeds to settle with creditors. The process involves filing a petition with the bankruptcy court that provides a range of information including an outline of the business assets and liabilities.

In some cases, the person appointed to liquidate the assets, referred to as the trustee, may continue business operations for a period of time if such operations would benefit creditors.

Which is right for my business?

Business owners that find they are struggling to make ends meet and considering bankruptcy are wise to seek legal counsel. An experienced bankruptcy attorney can review the details of your situation and discuss the options that are available that make the most sense to preserve your business interests.