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The Basics Of Business Bankruptcy Law

When a business struggles under its debt load, it can file for Chapter 7 or Chapter 11 bankruptcy. Each is treated differently under Federal law. If a company files for Chapter 7 bankruptcy, it ceases doing business. A trustee is appointed by the bankruptcy court. That trustee’s responsibility is to sell the assets of the business in order to pay its debts. Chapter 11 bankruptcy is used for a different purpose. A business can seek protection under Chapter 11 bankruptcy in order to reorganize. Below, we’ll give you an overview of how a business bankruptcy works including which creditors are paid first.

Optimism In Bankruptcy

When a company’s board of directors and shareholders believe that a business can be profitable despite the debt load that threatens to crush it, they’ll file for a Chapter 11 bankruptcy. The business will continue to operate under the protection of the Bankruptcy Code. High-profile companies such as K-Mart have sought protection under this code. Though major decisions regarding the business must be approved by the court, the company is still given a level of autonomy for daily operational decisions.

Creditor Hierarchy For A Business Bankruptcy

In the event that a business must be liquidated to pay its debts, Federal law dictates the hierarchy of the company’s creditors. Those creditors who have the least amount of risk in the company receive payment before others. For example, a bank may have offered a loan to a business based upon the value assessed on real estate owned by the company. That loan is secured. After liquidation, the bank would receive payment before creditors who have an unsecured interest in the business (i.e. vendors and stockholders).

On The Road To Recovery Or Ruin?

Many companies have succeeded in digging their way out of bankruptcy court into profitability. The breathing space given to them by the U.S. Bankruptcy Code provided the opportunity they needed to jump start the business. In many cases, however, a company will seek protection under the Chapter 11 Bankruptcy Code, reorganize and then fail to generate enough profit to sustain the business. In that case, the company goes through a liquidation process after which creditors are paid.

In the event that a company does file for bankruptcy and is liquidated, the retirement funds of its employees are usually protected. Federal law mandates that retirement funds must be kept separate from the funds used for the operational expenses of the business. If you own a business and are considering filing for bankruptcy, you should seek the counsel of a qualified lawyer. Business bankruptcies can be complicated. Approaching it without the experienced advice of a lawyer can be disastrous.

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