Business bankruptcy is the state in which the businesses lose control of their finances. Their finances are mismanaged to an extent where it is almost impossible to pay off the debts or the business owes. In such cases, the only option available to the business is to file a court petition for business bankruptcy. As per the various bankruptcy laws specified in the bankruptcy code, there are two types of bankruptcy claims that the businesses can file. Let’s go exploring the same.
Chapter 11 Business Bankruptcy
Because of the mismanaged finances, sometimes a business loses its profit making capabilities, and because of this they are unable to pay off the debt. However, there are still hopes that if they get some more time and some easier terms with the creditors, they can reorganize the things and put their finances back to the normal state. This is where the business bankruptcy under chapter 11 bankruptcy can bring the ultimate solution. Under the chapter 11 business bankruptcy, the bankruptcy court allows the business to carry on with its operation while paying of the creditors claims on a fixed repayment plan. In usual bankruptcy cases, the business itself is asked by the court to make the repayment plan. If the creditors do not have any objection with the repayment plan, the bankruptcy court approves the same. The main advantage of the chapter 11 business bankruptcy is that the business can also offer to pay reduced creditors claims after approval by the bankruptcy court. For example, once all the information regarding the future income ability of the business is submitted, the court assesses the same and may accept the debtor’s offer to pay only 25 cents on each dollar.
Chapter 7 Business Bankruptcy
The chapter 7 business bankruptcy code is the option for such businesses, which have ruined their profit making capabilities completely and do not have the resources to pay off their debts – no matter how much time they are given. In such cases, even the repayment plans will not work. Therefore, the bankruptcy court appoints a trustee that further liquidates all the assets owned by the business and then distributes the amount to the various creditors to settle their claims. The amount collected from selling the assets is distributed as per the priority status. For example, the investors are paid first because of the high risk involved in their investment following the secured creditors. The rest of the creditors are paid with the remaining amount if any.