When many people hear that a business has declared bankruptcy, their assumption is that this is the end of the business. The bankruptcy filing is the last step, and the business is now going to close. The financial issues it was facing meant that it was no longer a viable business venture.
This may be true in some cases, but it depends on the type of bankruptcy being used. With Chapter 7 bankruptcy, for instance, the business is often required to liquidate assets that it owns, like inventory, real estate and equipment. Selling these assets means that the business also has to shut down operations. But with Chapter 11 bankruptcy, the business may be able to continue operating.
A new financial plan
Chapter 11 bankruptcy is known as reorganization bankruptcy. Essentially, the debt is reorganized into a payment plan that will be addressed long-term. The business typically does not have to liquidate assets and does not have to close.
Chapter 11 is helpful for a business that is facing an overwhelming amount of outstanding debt, but that is still bringing in a steady income. Creditors may prefer to be paid back over time by spreading the debt out under the reorganization plan. In this sense, it is better for both the creditors and the business owner that the company can stay in business, continue generating income, and address its financial obligations.
Exactly what type of bankruptcy will work depends on the specific situation that the business finds itself in and what type of debt it is facing. But this helps to show why it is so important not to make assumptions about how bankruptcy works and why it is critical for business owners to understand the legal options they have.