As the economy of the United States continues to grow, and access to lines of credit are freeing up, new businesses are starting to proliferate. Personally, I think that is a great sign. Unfortunately, however, the reality is that many new businesses fail. Whether it was due to poor planning, inefficient distribution of resources and capital, or just bad luck, many new businesses often take on liabilities in order to get through the first years of starting. Sometimes, notwithstanding the hope and expectations, revenue just does not meet the expectations of the company. Another circumstance is a lawsuit that, for one reason or another, the business lost and is now facing a creditor seeking to aggressively enforce judgment. When a business is troubled by debt, individuals ought to understand the options available for them.
One of these options is bankruptcy – maybe. People file for bankruptcy, generally, to obtain a discharge of debts. That is, a discharge provides that a creditor can no longer take any action to enforce the claim owed to it by the debtor. In chapter 7 and chapter 13 cases, if the debtor obtains an Order of Discharge, the debts that are not paid during the bankruptcy (generally) are no longer enforceable. Business associations (such as corporations), however , are not entitled to a discharge in a chapter 7 case. So why do so many companies in the news file for bankruptcy?
The reason for a business to file for bankruptcy would be to centralize the affairs of the business as it is winding down, or to give it a chance to reorganize. If a corporation files a chapter 7 bankruptcy, it is not entitled to any discharge. It would provide, however, one forum for all creditors to submit claims, and one forum for the marshaling and liquidation of assets. A business owner might prefer this rather than having to fight several lawsuits in different courts. If a corporation files a chapter 11 bankruptcy, there has to be a realistic prospect that the company can come out of bankruptcy successfully by putting forth a plan acceptable to creditors that pays some of their claims back. The chapter 11 case, though, provides some time to get the business affairs turned around, as well as to create an exit strategy. While the costs are often high, chapter 11 cases, when done right, well worth the cost.
Outside of bankruptcy, a business can shut down its affairs with the state by filing dissolution documents. Many times, though, creditors will continue to pursue and hound the business and its principals, often resulting in costly litigation. Another option might be what is known as an “Assignment for the Benefit of Creditors,” though that only makes sense if creditors would accept it. Ultimately, when dealing with any (new) business, be sure to understand what kinds of liabilities are being undertaken (secured, unsecured, personal, etc.). If you would like to speak to an attorney, please call LORK at (718) 738-2324, or visit www.kistnenlaw.com.