Last year the number of business bankruptcy filings increased by an astounding 50-percent over the previous year. According to Bloomberg.com, a New York-based information service, nearly 20,000 businesses filed for bankruptcy in the first quarter of 2008. This number is expected to nearly double in the first quarter of 2009; leaving half a million employees without work.
Business bankruptcy affects everyone. When small businesses are forced to close their doors, the affects are generally felt within the community where the business was located. When large corporations file bankruptcy, both consumers and employees around the globe are affected. Regardless of business size, it's never a good thing when a company goes belly-up.
Filing business bankruptcy is a complex process. The new bankruptcy laws enacted in 2005 have placed restrictions on business owners seeking debt relief. The Bankruptcy Abuse Prevention and Consumer Protection laws require debtors to reorganize and repay a portion of their debts whenever possible.
There are four chapters that preside over business bankruptcy: Chapter 7, 11, 12 and 13. Also known as 'liquidation bankruptcy', Chapter 7 requires debtors to liquidate assets to repay creditors. Corporations who wish to reorganize debts and continue conducting business use Chapter 11. Chapter 12 is exclusive to farmers and allows restructure and repayment of debts. Chapter 13 is a repayment plan available for sole proprietors.
Limited Liability Corporations (LLC), corporations and partnerships must file for reorganization of debt. Sole proprietors might qualify o file Chapter 7 and have their debts discharged, but typically must file for Chapter 13 first.
When a business files for bankruptcy protection, an 'automatic stay' occurs. This action stops creditors from moving forward with collection action. The business owner must present a repayment plan to the court for approval. Once in place, payments are made to a Trustee who then disburses funds to creditors until debts are paid in full.
With Chapter 13, debtors must be able to maintain normal monthly payments and the additional chapter 13 payments. Otherwise, they will fail out of bankruptcy and lose protection from the court.
Businesses can be forced into bankruptcy if they owe creditors substantial amounts of money. Although rare, creditors can initiate 'involuntary bankruptcy' proceedings against a business. Usually, creditors will engage in this type of action when they believe the debtor has misappropriated funds.
It is never an easy decision for a business owner to file bankruptcy. However, there are instances when doing so will save the company from complete ruination and allow them to recover and become a viable business.
Filing business bankruptcy requires the assistance of a qualified attorney. If a business owner chooses to proceed with bankruptcy on their own they run the risk of having their petition denied.
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