Filing for bankruptcy can help a business get back on the right track, but this process is not devoid of risks and it involves some long-term consequences. These effects vary tremendously from business to business based on the type of bankruptcy that is being filed, but also on how the company is organized.
In this post, we will briefly walk you through the most common long-term effects bankruptcy can have on your company.
The bankruptcy options available for businesses, called chapters, are Chapter 7, Chapter11, Chapter 12 and Chapter 13. The basic differences between these options stem from the fact that Chapter 7 cancels the company's debts while Chapter 11 and Chapter 13 will help companies reorganize their business in order to cover the debts.
According to the type of procedure you choose, there will be different outcomes
By opting for Chapter 7, the owner will probably have to close down the business and sell most or all of its assets in order to repay the debts. On the other hand, with Chapter 11 and Chapter 13, companies are able to keep the business running.
The aim of bankruptcy is debt elimination, but the amount of debt that can be canceled varies based on the specific circumstances of each company. As previously mentioned, there are different outcomes in bankruptcy according to the type of chapter that is filed. But not all chapters are available for all businesses. If the company is owned by one person only, or by one person and a partner, they can opt for Chapter 7 and virtually cancel all of their debts. If the business is a corporation, the available options are Chapter 11 and Chapter 13 which, over time, involve the repayment of at least a part of the debt.
In the long-term, each type of bankruptcy affects the business in multiple ways playing an important role in different aspects such as the ability to get a credit.
Depending on the company's identity, the credit may also affect the owner's personal property
If the company is incorporated, it means that it has its own identity. In this context, the owner's personal credit report will only be affected if he or she takes business loans or opens credit cards in his or her own name and has debts related to those accounts.
However, there might be credit consequences even if the owner doesn't personally accumulate debt. The vendors who are not fully repaid may refuse to grant further credits in the future.
Generally, the ability to obtain a credit from financial institutions is altered after a business files for bankruptcy. The owner might have a hard-time taking another loan whether he or she needs it to keep the business running or to open a new company. Financial institutions are typically reluctant to lend money to someone whose business endeavor has failed due to reliability concerns.
No matter what type of bankruptcy is being filed, it will leave a mark on your credit score
If Chapter 7 is being filed, this will show on your credit report for the following 10 years. If Chapter 11 is filed, it will show on the report for the following 7 years.
Shareholders are also affected if the company they are involved in declares itself bankrupt. They will typically lose money, even if the business survives. The company's assets will partially or completely be sold, so its value is altered and so are the shareholders' benefits regarding that company.
A previous bankruptcy also affects the owner's ability to open a new business in the future. To create a new company, you have to request a business license from your state's business license office. Here, you will be asked if you have ever filed for bankruptcy and, if the answer is positive, you might be required to provide a detailed description of why you did it. The fact that you filed for bankruptcy will show on your credit report which can be verified by the license office, so there is no way of concealing this fact.
Bankruptcy has a major impact on the future of businesses and it's important to remember that it doesn't necessarily mean the end of life for your company. The three possible outcomes of bankruptcy are liquidation, reorganization and repayment.
Chapter 7 reliefs the debtor through liquidation. In Chapter 11, a business can keep running while the company is being reorganized for the purpose of repaying the debt at least partially. In Chapter 13, the company can continue operating in order to repay its debts over the following 3-5 years after filing.
The law governing bankruptcy is intricate and each case comes with its specific challenges
In this article, we provided generic information regarding the possible effects of business bankruptcy. In order to broaden your understanding of this topic and make the best decisions, it's recommended to consult a bankruptcy lawyer.
Our experienced lawyers are ready to provide you with more information based on your specific needs. We have the necessary skills and expertise to help you find the best way out of your financial difficulties.