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  Bankruptcy Relief For Small Businesses

Several times businesses can run into trouble due to a financial crunch or fund mismanagement. That is when filing Bankruptcy can come in handy. Nevertheless, before we understand how exactly Bankruptcy helps in such situations, it is imperative to classify the different types of businesses, as different clauses or chapters of Bankruptcy are applicable for different classes of business.

Partnerships, Corporations and Limited Liability Companies are legal entities that are separate from their shareholders or partners. They can file Chapter 7 or Chapter 11 for bankruptcy.

For partnership business, certain other factors are to be considered that may change the complexion of the picture. Partnerships are actually extensions of proprietorship business, and hence partnership business cannot file the bankruptcy alone. It is the owner cum proprietors who can file for Bankruptcy. This is because the assets and liabilities belong to the proprietor or partner & not to the company.

The individual owner may file Chapter 7, Chapter 11 or Chapter 13 Bankruptcy.

Whether The Business Should Be Organized Or Liquidated?

To seek a solution to the above question one must recognize the various causes of the problems a business is facing. One must note that by simply undertaking reorganization, a market cannot be created, revenues cannot be escalated overnight or discrepancies, between the skills available and the skills required to run the business can not be made up.

Hence, reorganization is effective where the problem is temporary in nature & can be addressed with additional cash.

Cash made available through reorganization also helps in rejecting leases or contracts that are unfavorable and hence can prevent further loss of important assets.

On the other hand, if the problems are deeper, the owners may be relieved after filing a Bankruptcy as this helps them in discharging their liabilities by selling the business as a running concern.

Drawbacks Of Reorganization For Managements

Chapter 11 requires the Management or the owners to comply with the provisions of the Bankruptcy Systems in their process of reorganization. However it is quite likely, that the management of small business may not have the desire and resources to engage in the reorganization process.

To explain, it is understood that the debtor will provide full disclosure of his financial situation to his creditors and to the court, for the protection of the automatic stay and other bankruptcy protections. The disclosure is to be made on a monthly basis.

These stringent conditions of reorganizations can empty the resources of any company that is already under great pressure, thus rendering such measure as reorganization non-beneficial.

The Right Business To Start After Liquidation

Once the process of reorganization or liquidation is over, it is for the owners to start a new business that may require small capital, few assets, or a business where they can provide consultancy to projects without actually investing in the venture. 
It is in the interest of the owners that they undertake liquidation, in or out of bankruptcy, and start a fresh business as a separate entity.

Chapter 7 - The Best Option

Once the business is really in the dumps, it is very difficult to salvage any substantial assets or qualities and it becomes impossible to undertake reorganization, as the debts are so huge and overwhelming.

Under such circumstances, Chapter 7 is the most suitable option for individual or a corporation. This is because the individual gets an opportunity to discharge off their debts and start afresh.

For Corporations, even though they do not get the advantage of discharging off their debts, yet they can undertake liquidation. As per provisions mentioned in Chapter 7, liquidation is under the direction of the trustee and at no expense to the shareholders.

An orderly liquidation assures the creditors that they will be paid to the extent of the assets available. Former management gets assured that the assets available will be used to pay the taxes, for which the individuals may be liable. Thus, bankruptcy can actually help relive the small businesses that are down and out.

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