If your corporation is reeling under mountains of debt or facing numerous lawsuits, you do have some options for debt relief. You may file for corporate bankruptcy protection under either a Chapter 7, which is a liquidation, or under Chapter 11, which is a restructuring of the corporation’s business operations, reorganization of its debt and even a change in management in some cases if there was fraud or criminal activity.
A Chapter 7 is for corporations and is typically to liquidate a business and to discharge unsecured debt. In some cases, a bankruptcy court will issue a temporary closure notice for a business. Generally, though, filing a Chapter 7 means that your business is closing for good.
Your personal assets in a corporation are protected from seizure in any court judgment or liquidation. Once you file for Chapter 7 protection, you will be able to discharge unsecured debt such as outstanding bills from suppliers or contractors and credit cards that were issued in the corporate name. Filing also stops any legal proceedings and prevents any creditor from suing the corporation.
Secured debt and tax obligations are generally not dischargeable as are any that were obtained by fraud, misrepresentation or by use of materially false financial documents that were relied on by the creditor to its disadvantage.
Chapter 13 Reorganization
For corporations that seek to survive, filing for reorganization under Chapter 11 can provide for considerable debt relief. If the corporation was badly mismanaged or its officers engaged in criminal activity, the business operations may be taken over by the bankruptcy court to be administered by a trustee. Otherwise, you or the corporation’s management can continue to operate the company though any transactions, such as the sale of an asset, must be court-approved.
Your corporate reorganization plan, to be approved by the creditors’ committee, must be submitted within 120 days after filing. If no plan is submitted, any creditor or the committee may submit one. The plan may reduce the debt owed while providing regular monthly payments to the secured creditors first. It also may provide for discharging employees and voiding or discontinuing certain contracts that are not advantageous. Union contracts and others such as long-term leases and agreements with suppliers or contractors can be renegotiated on more favorable terms for the corporation.
Secured creditors under Chapter 13 are entitled to payment for the full value of their collateral though the payments may be extended over time with interest.
Unsecured creditors are also paid under this plan, being divided into those with “priority claims” and all other “general unsecured claims.” Priority claims include taxes and employee benefits and wages accumulated before filing. For other general unsecured claims, they can be handled by either offering to the creditors a fixed payment plan, cash, or payment that is tied to the business’s cash flow or profits. Stocks, bonds or bank notes could also be issued to satisfy these claims.
Before filing for any type of corporate bankruptcy, consult with an attorney. The issues involved are extremely complex and will depend largely on how the corporation has been managed, if it wants to continue to operate, and the types of debts it has accumulated.