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What is Business Bankruptcy?
Home » Accounting » Business Bankruptcy » What is Business Bankruptcy?Business bankruptcy is what happens when a company or small business decides or is forced to go out of business because the business has sunk lower and lower into crippling debt and has little-to-no opportunity to regain financial stability or to even maintain a healthy, sustaining profit.
This decision to end business operations is the first step of business bankruptcy. The second step involves what route the business, via federal bankruptcy laws, takes in determining how the business will best be suited to hopefully recover from their debt or simply go out of business altogether.
A bankrupt business, also known as the debtor, most often will utilize Chapter 11 of the Bankruptcy Code in the hope of restructuring its business in a maintained attempt regain a consistent profit margin. Despite the fact that a bankruptcy court has the ultimate say in what decisions will or will not be made regarding the business, the current administration is still able to conduct daily business operations on a relatively normal basis.
However, if a business has no other choice but to completely shut down its doors and go out of business, then the most intelligent and often used choice is for the business to declare Chapter 7, in which the business utterly halts all of its functions and officially closes the doors. Then, all of the company’s assets are liquidated by a trustee where the money gained from this liquidation would be put towards eradicating the debt to investors and/or creditors.
Lastly if a debtor really wants to pay of all of his or her debts and has the capacity to do so (i.e. steady source of income, stable debt or decreasing debt and no critical expenses on a regular basis), then Chapter 13 will most likely be declared, giving the debtor the ability to pay off debt without giving up control or ending their business outright.
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