In the ever-evolving business landscape, economic downturns, internal mismanagement, or unforeseen circumstances can lead a company into financial distress. When faced with such predicaments, bankruptcy might be a viable option to consider.
Chapter 7 Bankruptcy: Liquidation
Chapter 7, also known as liquidation, is usually considered when a business has no feasible future. It is often a choice for those with overwhelming debt and limited assets.
Under this, the business ceases operations, and a trustee is appointed to liquidate (sell) the company’s assets. The proceeds from the sale are used to pay off creditors. After all assets have been sold and the proceeds distributed, the remaining debt is discharged, thereby providing the debtor with a clean slate. However, it is worth noting that not all debts can be discharged under Chapter 7, such as tax debts and secured loans.
Chapter 11 Bankruptcy: Reorganization
Chapter 11, commonly referred to as reorganization bankruptcy, is typically selected by businesses that believe they can become profitable again if given an opportunity to restructure their debts and obligations. While larger corporations most often choose it due to its complexity and cost, small businesses can also file under this chapter.
Under Chapter 11, the debtor remains in control of the business operations as a debtor in possession but is subject to oversight and jurisdiction of the court. The business is allowed to propose a plan of reorganization to keep its business alive and pay creditors over time. The plan must be accepted by the creditors and approved by the court.
Chapter 13 Bankruptcy: Adjustment of Debts
Chapter 13, or wage earner’s bankruptcy, is designed for individuals with regular income who wish to pay their debts but cannot. This option is also available to sole proprietors, as their personal and business assets are considered the same. It allows them to retain their property and pay off their debts over time, typically three to five years.
A repayment plan is proposed detailing how creditors will be paid. The debtor pays the Chapter 13 trustee, who distributes the money to the creditors per the plan. If the debtor adheres to the terms of the repayment agreement, the remaining dischargeable debt is released at the end of the payment period.
Why Consider Bankruptcy?
The decision to file for bankruptcy is not an easy one. It can impact a company’s reputation, credit ratings, and future financial prospects. However, it can offer businesses a chance to start afresh, free from the burden of unmanageable debt. It can provide a structured way to liquidate the company’s assets and pay off creditors in an orderly manner. For struggling businesses, bankruptcy can provide a lifeline, offering a structured means to reorganize and restructure their debts while continuing operations.
Understanding the differences between Chapters 7, 11, and 13 is crucial before filing. The choice largely depends upon the company’s financial situation, future prospects, and ultimate goal—whether to shut down the business or keep it alive.
Our Philadelphia Business Lawyers at Sidkoff, Pincus & Green P.C. Can Help You With Bankruptcy Options
At Sidkoff, Pincus & Green P.C., we are committed to helping businesses like yours navigate the complexities of bankruptcy. As one of the oldest firms in Philadelphia, we have been serving clients since 1958. If you need legal assistance figuring out your options, speak with our Philadelphia business lawyers. Complete our online form or call us at 215-574-0600 to schedule a consultation. Located in Philadelphia, we serve clients across Pennsylvania and New Jersey.
No one wants to think about bankruptcy, but unfortunately, sometimes it may be the best solution for a struggling business. To determine if filing for bankruptcy is the right choice, it is important to understand what filing entails, as well as what situations might give rise to considering such an extreme financial measure.
What is Bankruptcy?
Bankruptcy is a legal process that allows businesses and individuals who are unable to pay off their debts to either have those debts completely discharged or restructured over time with payment plans. There are different types of bankruptcy for businesses and individuals, but all types require the filer to provide detailed information about their assets and liabilities, as well as their income and expenses. This helps creditors determine how much money can be repaid.
When Should a Business Consider Filing Bankruptcy?
Businesses should only consider filing for bankruptcy when other options have been exhausted or the debt far exceeds the company’s ability to repay it in a reasonable amount of time. Other options may include restructuring debt through loan modifications, refinancing debt at better terms or having creditors agree to accept less than full payment in exchange for eliminating late fees or interest charges. If none of these options are available, then bankruptcy may be necessary in order to protect the business from further damage due to mounting debt obligations that cannot be met.
Types of Bankruptcy Available
The two types of bankruptcy most commonly used by businesses are Chapter 7 (liquidation) and Chapter 11 (reorganization). With Chapter 7, most of the company’s assets are sold in exchange for cash that is then used to pay off creditors; any remaining debt is discharged by the court. The company ceases operations immediately upon filing Chapter 7. If you have incurred personal debt on behalf of the business, however, be aware that your obligations for those debts may live on after business bankruptcy and after your business has ceased operations. If you have taken on personal liability for loans or other debts for the business, you may want to consider filing personal bankruptcy under Chapter 7 protection to attempt to eliminate these debts on yourself.
With Chapter 11, the company continues operating while attempting to reach an agreement with its creditors regarding how much will be paid out over time and which obligations will be forgiven in exchange for future payments being made on time. Chapter 11 business bankruptcy essentially allows for a clean slate for the business, after reorganizing the company’s debts.
The Philadelphia Business Lawyers at Sidkoff, Pincus & Green P.C. Help Protect Your Business
Filing for bankruptcy can often be seen as a last resort option for businesses who find themselves in financial distress due to overwhelming debt obligations they cannot meet without outside help from creditors or other sources. If your business is facing extreme financial trouble, discuss your legal options with the Philadelphia business lawyers at Sidkoff, Pincus & Green P.C. Call 215-574-0600 or contact us online. We proudly serve not only Philadelphia, but also Pennsylvania and New Jersey.
Small and large businesses are dealing with the fallout from the coronavirus pandemic. Supply chain issues and high inflation are making it harder to make profits. Many places of business are having a hard time finding good workers to help provide customers and clients with the goods and services that they need. Those are just a few of the many reasons why bankruptcy filings are on the rise.
A bankruptcy filing is a viable solution for reorganizing existing debt in a way that enables a business to continue. However, filing for bankruptcy does raise many legal issues that could lead to business litigation if the owner is not careful. The following are some commonly encountered legal issues that could arise when a business owner files for bankruptcy.
Worker Adjustment and Retraining Notification Act
The federal Worker Adjustment and Retraining Notification Act (WARN or the Act) affects businesses with more than 100 employees. The Act requires businesses to notify workers in advance of any planned business closings or mass layoffs that are likely to occur due to the bankruptcy filing.
Advance notice must be made 60 days before implementing any planned closing or layoffs. The notice will help workers to avoid surprises and make any necessary changes to protect their personal finances. It also helps them to find new jobs and avoid filing for unemployment. If you plan to continue doing business after reorganizing debts, the Act could help you to retain valuable employees.
Creditor Legal Issues
If you are considering a business bankruptcy filing, your business has debts that you currently cannot afford. The creditors for your business could reclaim any equipment, materials, or other assets that it might have provided. It generally helps to work with your creditors to determine a viable way to restructure the debts. That could help the creditors maintain their support of your business.
A creditor could file a proof of claim with the trustee assigned to your business bankruptcy case. The proof of claim helps to ensure creditors will obtain at least some compensation if any is available due to the bankruptcy. Creditors could include vendors, energy providers, and others who routinely provide goods or services that enable your business to function.
Debtor Legal Issues
Many places of business have debtors who owe them goods or services. Filing for bankruptcy does not automatically wipe out the debts owed to your business. Collecting those debts could be an issue and require legal assistance. Some debtors might refuse to pay and count on the pending bankruptcy to wipe out the debt. However, a business owner can overcome this with a court order.
Commercial Lease Assignments
Your place of business might have a commercial lease for the location that houses your business operations. A bankruptcy filing might enable you to assign your commercial lease to another business entity.
Many commercial leases have anti-assignment clauses that prevent renters from subletting or assigning the lease to other parties. A bankruptcy filing might change that. However, landlords might try to enforce anti-assignment agreements even while a bankruptcy filing is proceeding.
Philadelphia Business Lawyers at Sidkoff, Pincus & Green P.C. Can Help You Work Out Business Bankruptcy Issues
If your business is near bankruptcy, you can contact our Philadelphia business lawyers at Sidkoff, Pincus & Green P.C. for legal help. Call us at 215-574-0600 or contact us online to schedule an initial consultation. Located in Philadelphia, we serve clients throughout Pennsylvania and New Jersey.