Business Bankruptcy

Federal bankruptcy laws in the U.S. govern how companies go out of business or recover from crippling debt.

While technical definitions of bankruptcy can vary, the term refers to a situation where an individual or a business has liabilities that exceed assets, or where the person or business is insolvent by reason of not being able to meet financial obligations as they become due.

A bankrupt company, the debtor, might use Chapter 11 bankruptcy of the Bankruptcy Code to reorganize its business and try to become profitable again. Management continues to run the day-to-day business operations but a bankruptcy court must approve all significant business decisions. Some big Chapter 11 filings have included K-Mart, WorldCom, and Enron. A Chapter 11 case is extremely complicated and not a do-it-yourself filing. Consult with an attorney who is experienced in Chapter 11 filings to sort out the numbers, restructuring, etc.

Under Chapter 7 bankruptcy, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.

Virtually anyone or any type of business entity can start a bankruptcy proceeding by filing a petition in federal bankruptcy court. The bankrupt person who files a petition is called the bankruptcy debtor.

The filing of a bankruptcy petition affects all creditors of the debtor. There are many different categories of creditors, including:

• Secured creditors (usually those with a lien on a debtor's property)
• Unsecured creditors (usually vendors, credit card companies and anyone else who doesn't have a security interest in any of the debtor's property
• Judgment creditors (usually those creditors who have sued and obtained a judgment against the debtor prior to the bankruptcy being filed)
• Creditors with super priority claims (who have higher priority over other creditors because of special rules or proceedings within the bankruptcy)
• Creditors with administrative claims (usually creditors such as accountants or lawyers with claims that are given priority because of their having assisted in the bankruptcy in some manner)
• Post-petition creditors (who have extended credit to the debtor after the bankruptcy has been filed. Bankruptcy generally covers only pre-petition debts (those that were outstanding at the time the petition was filed).

Inevitably, every business is going to run into situations where customers file bankruptcy. Businesses will end up filing bankruptcy, as well.

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