Q:We lost our biggest customer last year. That bad event created a string of other negative occurrences. As a result it looks like we may have to file for bankruptcy. I see big companies do this and hear about how they later “emerged from bankruptcy.” How is that possible?
Jose G., Annapolis, MD
A: I know that bankruptcy is a frightening word. I also know that it need not be.
I spent many years as a bankruptcy lawyer and came to really appreciate the bankruptcy process. Most of the law is about retribution, except bankruptcy. Lawsuits and criminal courts are dedicated to helping people and society get revenge. But rather than revenge, bankruptcy is about forgiveness.
It forgives your debts, forgives your mistakes, and gives you a chance for a “fresh start.” Forgiveness is a rare thing in life, let alone the law. So the first piece of good news is that there is good news. “A fresh start.”
Bankruptcy puts you back in control of your business finances. If you are at a place where bankruptcy is a viable option then it is safe to assume that things are pretty bad right about now. I bet the creditors are calling and threatening to sue or already suing you and your business.
Here’s the second piece of good news. As soon as you file your paperwork, the bankruptcy court issues an order called an “automatic stay.” The stay is a federal court order sent to all of your creditors telling them to leave you alone. No more calls, no more threatening letters, nothing. They can take no actions to collect their money after you file. Even lawsuits are halted by the stay. The stay puts you back in the driver’s seat of your company’s finances.
There are four types of bankruptcies available to your business. The type you file depends upon your situation and goals. Below are the four types.
Chapter 7: 95 percent of all individual bankruptcies are Chapter 7. It takes only four months and for an individual it is a great process since it is quick, fairly inexpensive, and almost all debts are completely wiped out.
The problem for a business is that Chapter 7 (also known as a straight bankruptcy or liquidation) shuts down the business. If that is your goal, great, because that is what will happen. If your small business files a Chapter 7 bankruptcy, all operations will cease, the business will go out of business. A bankruptcy trustee will be assigned to sell the assets of the business for the benefit of your creditors. All business debts will be discharged, as will all personal debts if the business is a sole proprietorship or a partnership.
If your goal is to stay in business then consider one of the other chapters below.
Chapter 11: When you hear about a company emerging from bankruptcy, that is a Chapter 11 they are emerging from. A Chapter 11 is used to restructure the business. Under this chapter, exiting management of the business continues to run the business, although the bankruptcy court must approve significant business decisions.
Creditors are appointed to a committee that works with the company to develop a plan of reorganization. The plan may allow the company to pay 10 cents on the dollar to its creditors, or it might be 100 cents. It all depends. Once he plan is fulfilled he debts are paid (it usually takes several years) the company “emerges” from bankruptcy.
Chapter 12: Chapter 12 is for farmers only.
Chapter 13: Chapter 13 is like a mini Chapter 11. Whereas Chapter 11 is usually used by larger corporations, Chapter 13 is a reorganization plan for smaller companies that want to keep their doors open, such as sole proprietorships.
While not the optimum path you wanted your business to take, bankruptcy is not as bad as most people fear. Sometimes you just need a little forgiveness to get back on track.
For more information, check out my book The Complete Idiot’s Guide to Beating Debt – the second edition was just published.