When debts have become an unbearable burden for companies, bankruptcy can be an invaluable tool. Sometimes it just isn’t possible to pay back creditors with the amount of money that is coming in. Businesses in such a situation have several options at their disposal.
How to deal with debt
Before making the decision to file for bankruptcy, you may want to see if you can work out a payment plan with those to whom you owe money. It may be possible to set up a solution that works for all parties.
If a payment plan is not possible to negotiate, it may be time to file for bankruptcy. Businesses have two primary ways of doing that:
- Chapter 7: This form of bankruptcy liquidates all a company’s assets to pay off its debts. Because the court’s appointed trustee will sell everything, it is not recommended for companies that wish to stay in business. It may be a good option if you no longer want to keep your business and would like to dissolve it while getting rid of its debt.
- Chapter 11: Instead of liquidating a company’s assets, Chapter 11 bankruptcy allows a business to continue to operate while managing its debt through restructuring. When filing, a plan of reorganization must be submitted along with a disclosure statement. These documents should list the obligations a company has and a proposal for paying them off. The creditors must then vote on the plan. If suitable, the court will issue a confirmation.
Which type of bankruptcy is right for you largely depends on what your outlook is for the future. If you think your business could flourish when pressure from debt is reduced, Chapter 11 may be the best option. If you don’t think there is much of a future for your company, Chapter 7 could be the right choice. Like any big decision, it’s crucial to weigh your options carefully.