If your business is overwhelmed with debt or you are having difficulties making payments to your vendors or employees, you will need help in either getting your business profitable or winding it down and cutting your losses. Your options include filing for bankruptcy protection under either Chapter 11, if your business is incorporated, or Chapter 7.
Choosing Chapter 7
A Chapter 7 can be used by any business entity, including a corporation, to liquidate the business and its non-exempt assets. When you file, a trustee is appointed by a court to administer the corporate estate and to sell off assets that are not exempt under law and to pay off creditors according to their priority status.
When choosing a Chapter 7, you have decided that the business is not profitable and probably not worth saving or it is incapable of being revived because of its business model, the economy or the sheer weight of the debts. In other words, a debt reorganization available under Chapter 11 is not viable or likely to be approved. Although the trustee could operate the business for a time, it will be shut down at some point.
Employees have priority, followed by secured debtors who can have the collateral pledged for the loan returned to them or else paid out of the available assets and cash. If there are any remaining assets, the unsecured creditors including shareholders and owners are paid last. Otherwise, all unsecured debts are discharged.
Choosing Chapter 11
If your business needs a reorganization and you can demonstrate that it can operate profitably once contracts are renegotiated, debt principal reduced, and ineffective employees, stores, and operating models or systems replaced, then you could file for Chapter 11 protection.
A Chapter 11 can be a very complicated process. A committee is formed to represent the interests of creditors and stockholders that work with you and your attorneys to formulate a workable plan to get the company out of debt and into profitable status. The corporate directors and officers usually retain the power to operate the business but must do so in conjunction with the interests and approval of the committee.
Some companies remain in Chapter 11 for several years and are able to emerge with new life. Most creditors want to be paid so it is in their best interests to see that the company gets back on its feet or be forced to share in whatever assets are liquidated in a Chapter 7. Unfortunately, the shareholders generally will receive a loss on their return regardless if the corporation is in Chapter 11.