02/18/2016
Business Bankruptcy Options
If you have been watching the recent presidential debates as I have been, you may have noticed several candidates taking aim at Donald Trump, using his history of corporate bankruptcies as ammunition. While it is true that over the last 25 years, four of Trump's many businesses have gone through Chapter 11 bankruptcy, in each case it was for the purpose of restructuring and reorganizing the businesses and their debts, not for liquidating the businesses and wiping out their debts, as it has been implied by some of Trump's opponents.
There are two main types of business bankruptcy proceedings - Chapter 11 and Chapter 7. Chapter 11 is used for the struggling business that is overwhelmed with debt and has hit a rough patch, but the owners, given the opportunity to restructure the debt and alter the terms of the outstanding loans, feel that they could rehabilitate the business. In Chapter 11, the Bankruptcy Trustee works with the business to create a repayment plan for the business to pay back outstanding loans. Chapter 11 can be a considered a good business decision in many cases and Trump has claimed each bankruptcy involving one of his companies was for the good of the company.
The other main bankruptcy option available to businesses is Chapter 7. Chapter 7, or "liquidation" bankruptcy is more appropriate for the business which is essentially "throwing in the towel" and intends to close its doors and liquidate its assets. In a Chapter 7 bankruptcy, the Bankruptcy Trustee presides over the sale of the company's assets and using the proceeds to repay as much of the company's priority debts as possible. Any debts still outstanding are typically discharged. In order to be eligible for a Chapter 7, you must pass a "means test". If a business has too much disposable income, it will not be eligible for this type of bankruptcy.
It is important to note that any personal guarantees made by owners for the debts of their businesses are not eliminated through a corporate bankruptcy. This means that even if the business debts are successfully discharged in bankruptcy, the creditor may still pursue the owner personally for the debt if there was a personal guarantee made by the owner.
As always, if you have any questions about this or other legal issues, or can be of help to you or your clients, please feel free to contact me.