QUESTIONS & ANSWERS
Business Bankruptcy FAQs
-
What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?
-
What will happen to my corporation if I file a personal bankruptcy?
-
Are a business’s retirement plans protected from bankruptcy?
-
Can a company that files a Chapter 7 bankruptcy start a new business afterwards?
What is the difference between a
Chapter 11 and a Chapter 7 bankruptcy?
Chapter 7 bankruptcy may be used by businesses that
wish to liquidate and terminate their business. Under
Chapter 7 bankruptcy, the company usually stops all its
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 debt. If the business is owned as a
sole proprietorship, then the sole proprietor is eligible to
receive a discharge of his or her business and non-business
debts.
Under Chapter 11, a debtor has the opportunity to
restructure its secured debt payments; to reject burdensome
leases; to pay tax obligations over time; to sell unneeded
assets; to pay unsecured claims at a discount, and to have
claims determined by the court. Unlike a Chapter 7 case, the
appointment of a trustee to oversee the case is the
exception, not the rule. In a Chapter 11, current management
of the debtor operates the debtor as a
“debtor-in-possession”, although operations are strictly
supervised by the Bankruptcy Court. The theory behind
Chapter 11 is that the business can make greater payments to
its creditors through continuing operations than the
creditors would receive in a Chapter 7 liquidation. The
culmination of a Chapter 11 case is a Chapter 11 plan.
What is a Chapter 11
reorganization plan?
A Chapter 11 plan is usually filed by management of the
debtor, although creditors sometimes are permitted to file a
plan. The plan separates claims in separate classes, with
similar claims having their own class. Generally, claims
consist of administrative claims (claims incurred after the
case is filed); certain priority claims, which are comprised
of claims that Congress decided should have special
treatment under the Bankruptcy Code; secured claims (claims
for which property of the debtor serves as collateral);
unsecured claims; and equity. The plan will classify each of
these types of claims and propose treatment for them.
Creditors are then given a chance to vote on the plan. If
the requisite number of creditors vote in favor of the plan
and the plan otherwise complies with the requirements of the
Bankruptcy Code, the plan is “confirmed” by the Court and
the confirmed plan serves to modify treatment of the various
claims in the case. Once confirmed, the debtor is
responsible for making payments and otherwise performing its
obligations under the plan.
What will happen to my
corporation if I file a personal bankruptcy?
Since a corporation is a legal entity different and
distinct from its shareholders, the bankruptcy of a
shareholder does not affect the corporation. The bankrupt
shareholder's shares in the corporation, however, are an
asset of his bankruptcy estate and may be sold in his
individual bankruptcy case.
What type of bankruptcy should
my company file?
Choosing a strategy in bankruptcy involves risk and a
careful analysis of possible results of filing. In some
instances, it may be better not to file bankruptcy or to use
one of several state law alternatives in resolving company
debt. Some strategies may involve a sale of assets either
prior to or during the bankruptcy, so that a successor
company will carry on the debtor’s business. It is advisable
to contact an experienced
business bankruptcy attorney at Howard, Stallings, From &
Hutson, P.A to discuss your options.
Are a business’s retirement
plans protected from bankruptcy?
Retirement plans vary dramatically from company to
company. Some companies have “unfunded plans,” which are a
general obligation of the business similar to other company
obligations. Properly established and funded plans under
ERISA are generally protected and are not included as
property of the bankruptcy estate of the Company. In ERISA-
qualified plans, the law requires an employer to keep
retirement money in a trust separate from the employer's own
funds. However, if your employer's business is having
problems, it may be worth your effort to ask questions about
the security of your retirement money.
Can a company that files a
Chapter 7 bankruptcy start a new business afterwards?
Yes, but it is generally inadvisable since a company does
not receive a bankruptcy discharge. It is usually better to
start over with a new company, sometimes after purchasing
assets through a bankruptcy sale from the bankrupt
corporation. On rare occasions, a company may purchase the
corporate “shell” of a company eligible to sell stock on a
listed exchange to avoid going through the registration
process. In any event, one would want to change the
corporate name to avoid the stigma of the previous
business’s failure.
Do I need a lawyer to assist my
company with bankruptcy?
In any bankruptcy, principles of law regarding creditors’
claims come into play. Although bankruptcy is intended to
provide relief to debtors, it balances the debtor’s interest
against those of creditors to whom money is owed. Selecting
the best course of action should be based on the probable
results, after assessing legal risks. It is always in your
best interest to seek the advice and expertise of an
experienced bankruptcy lawyer to handle your company’s
bankruptcy needs. An attorney can assist with deciding
whether to file bankruptcy and which chapter to file and can
also assist in filing the bankruptcy and creating a
re-organization plan. Contact Howard, Stallings, From &
Hutson, P.A today.
