There are certainly cases where a business closes its doors when it declares bankruptcy. This is most common with liquidation bankruptcy, or Chapter 7. The business is required to liquidate some of its assets to pay off at least a portion of the debt. By selling tangible assets, real estate, inventory and more, the business effectively loses its capacity to operate and has to close.
That being said, it is not necessary for a business to close in all cases when it declares bankruptcy. For example, if the business uses Chapter 11 bankruptcy, or reorganization bankruptcy, the company is typically allowed to continue operating while reorganizing and restructuring its financial obligations.
Why is this allowed?
The goal is to create a positive financial future. If that’s impossible, liquidation may be necessary to pay off some of the debt.
But creditors would prefer that the business reorganizes so that it can become profitable. This way, once the business begins earning money again, the business owner may be able to pay off the full value of the remaining debt. Chapter 7 may guarantee a small payment, but it could just cover a fraction of what is owed. Chapter 11 tends to take much longer, but it may ensure that the creditors eventually regain all of the money loaned to the business.
Naturally, this is also a better option for the business owner. They may believe that the current debt structure makes payments unaffordable, but they can clearly show that the business plan works and that the company is capable of earning money. They just need reorganization to get things in line to be profitable moving forward.
Every bankruptcy case is unique. If you are a business owner considering bankruptcy, it is important to understand the legal options at your disposal and all the necessary steps to take.