Individuals, creditors and businesses are protected by the bankruptcy law of the United States. Bankruptcy laws for businesses facilitate and enable reorganization of debt to pay off creditors without the business being destroyed or the orderly liquidation of assets to pay off creditors and divide up a failing business for others to buy up parts of and try to make successful. Therefore, the bankruptcy laws protect the business, the owners of businesses, operators and creditors of the business, consumers, and the economy as a whole.
All bankruptcy cases are presided over by federal courts of the United States. There are two types of bankruptcy for business owners, as established by federal law in 1978: Chapter 7 and Chapter 11. There is also what is known as Chapter 13 bankruptcy, but incorporated businesses cannot file under that type. Self-employed individuals, however, may file under Chapter 13.
For businesses, Chapter 7 would entail filing a petition for bankruptcy, then a court-appointed interim trustee would be in control of the business’ non-exempt assets and accounts. This appointed and temporary trustee has broad power over the business during his appointed time. Finding unsecured financing, making managerial changes, and liquidating assets so as to pay off creditors while trying to keep the business from total failure are all within the scope of the trustee's powers. Chapter 7 bankruptcy is the option for liquidation.
For reorganization of a business, Chapter 11 bankruptcy is the option. Under this option, the court oversees a flexible process by which the debtor business and its creditors work out payment arrangements to their mutual benefit and solution. The business' principals maintain control of the business and remain in possession of its assets. The business' management team goes on court record as being "debtor-in-possession", or DIP, and there is no trustee appointed. However, if the creditors see that no viable solution is arrived at by the DIP, and that the assets are still mismanaged, they can petition the court to intervene and to appoint its own agent that will replace the DIP. For the federal court to do this intervention, it must be satisfied with evidence that the creditors are correct in their assessment of continued mismanagement.
The forms filed by the business in federal court, like those that document the business’ assets and liabilities, should be perfectly accurate and filed in the correct manner. The business may lose its bankruptcy protection, and the business could be totally lost, if it fails to accurately and correctly file the forms needed. Therefore, if you own a business either alone or with partners and you deem that you may need to file for bankruptcy, you should consult a bankruptcy lawyer. When the lawyer is working in this capacity with you, he would be put on file by the federal court as a “Debt Relief Agent”.
If you own a business and you and any partners are considering filing for bankruptcy, consult a bankruptcy lawyer who has experience working with business owners.
