Downsides to Filing for Bankruptcy
In 2017, we described different kinds of bankruptcies and how they affect your business. Businesses can only file for chapter 7 or chapter 11 bankruptcies, and are generally filed when a business is significantly struggling financially. There may be some positive outcomes for your business from filing for bankruptcy, but do you know the drawbacks of filing for bankruptcy? This article will present a few of the main disadvantages of filing for chapters 7 and 11 bankruptcies for your business.
Ch. 7 Con | Loss of Control
When you file for Chapter 7 bankruptcy, the court will appoint an outside trustee (or liquidator) to sell all of your business assets to satisfy needs as determined by the court. During Chapter 7, the business owner has no control over the priority of asset sales or how they are disbursed, nor how expensive the assets are disbursed for. In many cases the trustee and court sell assets for cheap prices, considerably less than their actual value. The process can also be time consuming if the court needs several additional documents to review (e.g. tax returns, bank statements). (AZCentral.com)
Ch. 7 Con | Business Ceases to Exist
Because the court will appoint a trustee to sell all business assets, that will leave little assets and extra money in the company, and the business will likely cease to exist. Even after the trustee has completed their job, it is likely the business will still owe liabilities and not be discharged of any debts. It’s also possible if someone has a successful new business (after filing for bankruptcy with an old business), they might have to pay back some past debt with the successful business’s assets. (Mobankruptcyblog.com)
Ch. 11 Con | Long and Costly
With Chapter 11 bankruptcies, the business handles sale of its assets (instead of the court appointing a trustee). Unfortunately, the process is complex, tedious and can take several years for the business to resolve and repay all debts (AZCentral.com). The long process usually means an expensive bill at the end, from consistent lawyer and court fees. In addition, the bankrupt business has about 120 days to submit a reorganization plan to return to profitability.
For more information on Chapters 7 and 11 bankruptcies, click on the link to our blog post: Difference Between Chapter 7 and Chapter 11 Bankruptcies