Business Bankruptcy Basics

Business bankruptcy is a topic that many entrepreneurs and company owners prefer to avoid. However, the reality is that economic challenges, market shifts, and unforeseen events can all put a business at risk of financial distress. Understanding the process and implications of bankruptcy can help businesses navigate tough times and make informed decisions about their future.

What Is Business Bankruptcy?

Business bankruptcy is a legal process in which a company that cannot meet its debt obligations seeks relief through the court system. The goal of business bankruptcy is to either restructure the company’s finances and operations to allow it to continue operating or to liquidate its assets in an orderly manner to pay off creditors.

There are several types of bankruptcy filings available to businesses, each serving a different purpose and offering different levels of protection to both the company and its creditors.

Common Types of Business Bankruptcy

1. Chapter 7 Bankruptcy: Liquidation

Chapter 7 is the most straightforward form of bankruptcy, and it is often referred to as “liquidation.” Under Chapter 7, a business’s assets are sold off to pay creditors. This type of bankruptcy is typically used when a company is no longer viable and cannot continue its operations. Once the assets are sold, the business is dissolved.

• Who can file: Any business entity, including corporations, partnerships, and sole proprietorships.
• Outcome: Complete closure and dissolution of the business.
• Debts discharged: Most unsecured debts are wiped out, but secured creditors may take priority in receiving payment from the liquidation.

2. Chapter 11 Bankruptcy: Reorganization

Chapter 11 is often referred to as a “reorganization” bankruptcy and is the most common type used by larger businesses. It allows a company to continue its operations while reorganizing its debt and business practices. Under Chapter 11, businesses propose a plan to pay off creditors over time, typically by reducing debt, renegotiating contracts, or even liquidating non-essential assets. This type of bankruptcy is designed for companies that want to remain in business but need a fresh financial start.

• Who can file: Corporations, partnerships, and LLCs.
• Outcome: Business continues operations while restructuring its debt and operations.
• Debts discharged: Unsecured creditors may not be fully paid, but the business has the opportunity to stay afloat.

3. Chapter 13 Bankruptcy: Wage Earner’s Plan

While Chapter 13 is more commonly used by individuals, it can sometimes apply to small businesses, particularly sole proprietors. This form of bankruptcy involves creating a repayment plan where the debtor agrees to pay back a portion of their debts over three to five years, while keeping their business operational.

• Who can file: Sole proprietors with a steady income.
• Outcome: Debtor repays creditors over time while continuing to operate the business.
• Debts discharged: Some unsecured debts may be discharged, but repayment is expected over the plan period.

Businesses seeking bankruptcy in Dallas should contact our team of experienced attorneys to learn more about how to manage business related debt.