Types of Commercial Bankruptcy

Declaring bankruptcy is almost always a difficult decision. Just as individuals might file personal bankruptcy cases to address problems in their financial lives, commercial bankruptcy is available to financially distressed businesses. Though many people view bankruptcy a last resort, it can be a good decision. For individuals, most common types of bankruptcy are chapter seven and chapter thirteen bankruptcies. Less talked-about online are commercial bankruptcies. If your business is failing and it owes more money than it is taking in, a commercial bankruptcy might allow it to restructure some or all of its debt while continuing to operate.

Commercial bankruptcy can impose some restrictions on the day-to-day operations of your business, but it can also be critical to turning things around and becoming profitable once again. For nearly all types of American businesses, there are two relevant types of bankruptcy cases: cases under Chapter 7 and cases under Chapter 13 of the United States Bankruptcy Code.

Commercial Bankruptcy – Chapter Seven

Chapter seven bankruptcy is available to both individuals and businesses and is the most common type of bankruptcy declared in the United States. While many assume that declaring bankruptcy frees a business from paying on its debts, that is only half true. A business that is liquidating under Chapter 7 must pay its creditors pursuant to the priority scheme set out in section 507 of the Bankruptcy Code. If, after that distribution, creditors remain unpaid, the debtor does not receive a discharge–it’s just that nothing remains from which those creditors can be repaid.

Upon filing chapter seven bankruptcy, a bankruptcy Trustee is named to examine and, if necessary liquidate the assets of the business. A business that files a case under Chapter 7 must immediately cease all business operations and turn over its books and accounts to the Chapter 7 Trustee.

Commercial Bankruptcy – Chapter Eleven

So far as business operations go, chapter eleven bankruptcy is much less disruptive than chapter seven bankruptcy. The business can keep its pre-bankruptcy management and continue to operate as a “debtor-in-possession.” Chapter 11 bankruptcy is often referred to as “corporate restructuring.” Less profitable or only slightly valuable parts of the business – often certain departments or little-used assets –can be liquidated to fund a plan of reorganization. Debtors in Chapter 11 cases will usually seek to preserve mission-critical and highly profitable assets.

Just as in a case under Chapter 7, the “automatic stay” applies in chapter eleven bankruptcy cases to stop adverse creditor actions. The automatic stay will stop the collection calls and eliminate any court action against your business until the automatic stay is lifted or dissolved. This is often a significant relief to many business owners, especially those facing asset sales or seizures.

Sole Proprietorship

Sole proprietorships are businesses that are owned by a single individual and have no legal existence apart from that individual. Nevertheless, individuals who act as sole proprietors have bankruptcy rights that are slightly different from the normal, consumer bankruptcy debtor. If their debt arises primarily from the operation of their business, they may be eligible for Chapter 7 relief in situations where other, non-business debtors would be required to file a case under Chapter 13 and repay their creditors some or all of what they owe.

Bankruptcy is never an easy choice, but when expenses exceed income for a number of months or years, commercial bankruptcy might be a reasonable option for your business. Call (412) 925-8194 now for an immediate, confidential consultation and to discuss options for you and your business.

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