Personal and Business Bankruptcy: Chapter 7, Chapter 11, Chapter 13
A Chapter 7 filing is an option for a business that finds itself unable to continue. Under a Chapter 7 bankruptcy filing, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate [sell] the company's assets. That money is used to pay off the debt, which includes debts to creditors and investors.
A Chapter 7 corporate bankruptcy has nothing to do with personal bankruptcy. You most likely will keep your home and your car and other property. However, your business will be shut down entirely. But where a business owner has personally guaranteed the debt of his or her business, he or she generally has to file for bankruptcy protection from creditors when business goes bad.
Companies that have issued stocks or bonds would be required to pay those investors back when filing bankruptcy under Chapter 7 if there are funds available. A bondholder would be in a better position than a stockholder. The owners are the last to be repaid when a company goes out of business and files for bankruptcy under a Chapter 7 bankruptcy filing.
Equity holders have the full potential of seeing a higher return, reflected in the stock's price when the company is healthy. But the tradeoff for this possibility of boosted returns is the risk that the stock may lose value. When a company files a Chapter 7 bankruptcy, equity holders may not be fully compensated for the value of their shares.
Under a corporate Chapter 7 filing, a corporate debtor is not discharged. In many cases, the sum of the business's assets are encumbered to an under-secured creditor. There are exceptions, however. If there is little to no secured debt, a Chapter 7 bankruptcy submits the assets available through a formal distribution process. The Chapter 7 Trustee administers the assets to the creditors, and there is less likelihood that a creditor will claim that shareholders took the assets or favored their friends by repayment of those debts and not others.
If you find that your business has suffered during this dire economic times and you are finding it difficult or impossible to continue, a Chapter 7 bankruptcy may be your option. Contact us at The Burns Law Firm, LLC, today.