Every day, businesses across the United States must consider whether to file corporate bankruptcy. In most cases, the business doesn’t receive a discharge of debt, unlike personal bankruptcy proceedings.
Businesses should follow these three steps to file corporate bankruptcy:
- Decide to dissolve under Chapter 7 or restructure under Chapter 11.
- Submit the bankruptcy petition and proper documentation to the court.
- Follow through with the court-ordered repayment or restructuring plan.
Determining Which Corporate Bankruptcy Filing to Use
Corporations may file for bankruptcy under either Chapter 7 or Chapter 11. The method used is determined by the desired outcome. Businesses that file Chapter 7 cease to exist, while businesses that file under Chapter 11 are restructured in an effort to make the business more profitable. In both cases, a temporary stay is granted against creditors collecting on debt.
What is Chapter 7 Corporate Bankruptcy?
Some businesses are so far in debt that they can’t continue to maintain day-to-day operations. Filing corporate bankruptcy under Chapter 7 allows the business to be dissolved. That doesn’t mean the company is off the hook for remaining debt. Any business assets must be liquidated and the funds paid to creditors first. The owners receive any funds that are left after the debts are repaid.
Paying Off Chapter 7 Debt
Businesses that file Chapter 7 corporate bankruptcy must pay back creditors in a specific order.
Secured creditors are paid first. These are usually banks or other financial institutions that have offered loans secured with collateral. Some examples of collateral are land, machines, factories, or office buildings owned by the business.
In most cases, secured creditors can’t go after an owner’s personal holdings. However, if an owner uses personal property to secure a business loan, the property must also be liquidated and the funds used to pay creditors.
Investors or banks that provide short-term loans usually fall within this category. They are the second to be paid once the bankruptcy court liquidates the business’ assets. Unsecured credit means no collateral is offered to back the loan, making it a riskier investment than secured credit.
Stockholders own a portion of the company. They receive a proportional payment for each share they hold in the company after secured and unsecured creditors are paid. Unfortunately, most debts outweigh assets in Chapter 7 proceedings, making company stock virtually worthless.
What is Chapter 11 Corporate Bankruptcy?
Businesses that want a fighting chance to survive and manage their debt may file Chapter 11 bankruptcy. The reorganization plan includes guidelines for repaying creditors and stockholders.
Types of Committees
Committees are appointed by the U.S. Trustee to represent specific groups and their interests. The U.S. Trustee is the bankruptcy branch of the U.S. Justice Department.
At minimum, the Official Committee of Unsecured Investors is appointed to represent all unsecured creditors and bondholders. A second official committee may be formed to represent stockholders. Another committee may also be formed to represent the interests of additional groups, such as employees or secured creditors.
Developing a Reorganization Plan
Each of the committees works with the business to develop a reorganization plan. Next, the plan and a disclosure statement are submitted to the court and checked for compliance with corporate bankruptcy laws by the Securities Exchange Commission.
Finally, the reorganization plan is voted on by creditors. Stockholders may also be allowed to vote. If the plan isn’t approved by vote, the court can still grant the company power to move forward. Once the plan is approved, the company begins paying debts according to plan guidelines.
Corporate bankruptcy law allows businesses to dissolve under Chapter 7 or to restructure under Chapter 11. Debts and assets must be weighed carefully to determine the best course of action. Filing corporate bankruptcy can mean the end of a business, but many entrepreneurs are able to learn from their mistakes and move forward.