Frequently Asked Questions About Business Bankruptcy

Business Bankruptcy FAQs

If your business is running out of money and you are behind on loan payments, rent or taxes, do not wait to speak with a knowledgeable OC business bankruptcy lawyer at McFarlin LLP. Our legal team has the experience and resources to help you understand your options and guide you through the bankruptcy process that is best suited to your needs. Please review the following frequently asked questions. Take action as soon as possible to begin working toward a positive outcome today.

Q. What is an involuntary bankruptcy?

A. Depending on the circumstances, a creditor may “force” a business into bankruptcy by filing an involuntary bankruptcy petition. This initiates the automatic stay to prevent further creditor actions, but also allows the business to continue operating. The petition acts more as a complaint, in which the creditor asks the court to declare the business bankrupt. The business may consent or file its own voluntary Chapter 11 to gain control of the situation.

Q. What will happen when I file a Chapter 7 bankruptcy for my business?

A. Under Chapter 7, creditors will be barred from further collection activity, known as an automatic stay. An interim trustee is appointed by the United States Trustee’s office to ensure that all the debtor’s assets are sold to pay off the creditors.

If your business is a partnership, the trustee will close the business and sell off its assets. If the assets do not pay off the creditors, the trustee may take the partners’ personal assets to sell or sue each partner to pay the remaining creditors.

As a corporation or limited liability company (LLC), your personal assets may be protected from the proceedings if you are a shareholder. However, if you cosigned or personally guaranteed the loans, the trustee may go after your personal assets.

Q. When should I file Chapter 7?

A. It is recommended that a business file for Chapter 7 bankruptcy only after it has exhausted all other options. If no other options are available and the business is unable to pay its debts or has debts greater than its assets, the management or business owner is strongly advised to discuss bankruptcy with a knowledgeable bankruptcy lawyer as soon as possible.

Q. What happens when I file Chapter 11 for my business?

A. Under Chapter 11, the debtor may restructure its finances according to a plan approved by the bankruptcy court. This allows the debtor to balance its income and expenses while remaining in operation. The debtor may also sell its assets in order to reduce its debts. This option can be complex and risky, especially for small businesses.

While a small businesses may not be appointed a creditors’ committee under Chapter 11, they may be subject to additional filing requirements and trustee oversight. Contact an attorney to discuss whether this is a viable option for your business.

Q. What is a creditors’ committee?

A. The group of people selected to represent the business’s creditors in the bankruptcy process. The creditors’ committee may include secured and unsecured creditors. The secured creditors will have a first claim to assets and unsecured creditors will have power depending on the amount they are owed.

Q. What is receivership?

A. It is a type of corporate bankruptcy where a receiver is appointed by the bankruptcy court or the creditors to run the bankrupted corporation. The receiver assumes all decision-making power and will have full authority to decide how received assets are managed.

Trusted Bankruptcy Representation

Whether you are the sole proprietor of your business or run a corporation or LLC, it is crucial that you seek experienced guidance before filing for bankruptcy. The process can be complicated and there is far too much at stake to go at it alone.