Small Business Brief

Financial Services

What Happens When a Company Goes Bankrupt?

Having to file for bankruptcy is always a tough decision to make, so what happens when a company goes bankrupt? Whether you’re considering declaring bankruptcy or just interested in the process, here’s what happens to businesses during the process.

Have you ever wondered what happens when a company goes bankrupt?

Filing for bankruptcy is a difficult decision to make. Before you do so, it’s important to weigh up your options and find out exactly what you can expect.

In this article, we’ll help you do that.

Read on to find out how the process works.

What Happens When a Company Goes Bankrupt

When you no longer have the working capital to keep your business afloat, there are several options for filing for bankruptcy.

Filing a Petition

The first step in the process of companies filing for bankruptcy is filing a bankruptcy petition.

Along with these, bankruptcy schedules must also be filed. These documents provide details of all the assets that the company owns, as well as its income, expenses, and any liabilities it has.

On top of that, it also includes any contracts and leases that the company is tied into.

Once these documents have been filed, an automatic stay immediately goes into effect. This is an injunction that requires any creditors to cease all attempts to collect debts.

From then on, the case is overseen by a bankruptcy trustee, who is appointed by the US trustee program.

Personal Bankruptcy

If you’re a sole trader, your business is classified as an extension of you.

This means that you need to file for personal bankruptcy. However, this doesn’t mean that you end up losing all of your personal assets, too. In fact, you may be able to go through the process without losing your property or car.

There are two options to file for, Chapter 7 and Chapter 13.

In Chapter 7 cases, a bankruptcy trustee sells all non-exempt property and assets to pay creditors. However, under Chapter 13, the debtor retains all of their property and instead makes monthly payments to their trustee. The trustee then passes these payments on to the creditors.

If it’s your first time filing for bankruptcy, you could be given an automatic discharge after 9 months, which allows you to have a fresh, debt-free start.

See this website to find out more about personal bankruptcy and how it works.

Business Bankruptcy

When a business operates as a corporation, LLC or a partnership, it’s regarded as separate from the people who own it.

Similar to personal bankruptcy cases, the bankruptcy trustee will take possession of the company’s property and any assets. Then, those will be sold in an attempt to raise funds to pay off any creditors.

A business can also open a Chapter 11 bankruptcy case. In this case, a confirmation hearing is held in court. During this hearing, a plan is made to reorganize the company.

Once the plan has been settled and confirmed in court, the business will continue to be run and any turnover will be pass on to creditors. This is operated either by the debtor or the bankruptcy trustee.

Manage Your Debts the Right Way

Now that you know what happens when a company goes bankrupt, you can prepare yourself to make that all important decision.

Prevention is better than cure, and ideally, you should take care of your debts before you get to that point. However, that can be hard to do on your own. A debt management company can help you with that.

Find out what debt management companies do and how they can help you.