When a Small Company Declared Bankruptcy

Money is always involved in business, and it is a standard practice for businesses, mainly smaller ones, to take out loans for their operations. Individuals often take out loans as well, such as for mortgages on a house or an auto loan. Bankruptcy, meanwhile, describes when a person or a company officially recognizes and declares that it cannot pay off its debts with its current financial affairs. It should be noted, though, that going bankrupt does not necessarily mean “broke and hopeless.” Instead, a bankrupt company may find debt relief when it files for bankruptcy in court, and this may have a positive outcome for all involved (nothing is being guaranteed here, however). A bankrupt company or wealthy individual may call upon a bankruptcy lawyer to help them with this process, and protect them from unfair practices on another party’s part during court. A bankruptcy law firm may be contacted for this very reason. What is there to know about navigating bankruptcy court today and finding proper debt relief?

Why Bankruptcy Happens

A company may go bankrupt because it has assumed more debt than it can realistically handle, or it has suffered mundane business setbacks. Sometimes, a company’s client base or consumer base may dry up, or the markets may shift away from what a company sells or offers. In other cases, however, a bankrupt company is the victim of theft or fraud. Cyber crime is on the rise, and hackers and other criminals may break into a company’s data servers or its Cloud storage and obtain data such as bank account numbers and passwords, client and customer profiles and credit card numbers, and more. IT professionals work hard to prevent such crime, but it does happen, and a lot of money might be stolen. This may harm a large company and drive a smaller one completely bankrupt. Meanwhile, fraud is when a white collar criminal will falsify or distort financial information to trick investors into making bad investments, and money might also be embezzled, or secretly stolen and put into the white collar criminal’s pockets. Such acts are highly illegal and punishable in a court of law, and they may drive a company bankrupt when it is tricked into making bad investments. Such a company may then declare bankruptcy, hire a bankruptcy attorney, and visit a court of law to settle this.

Bankruptcy Court

Chapter 11 is a common form of bankruptcy, and a chapter 11 bankruptcy may be declared by a wealth individual who needs debt relief. Most chapter 11 cases, however, are filed by smaller companies who have under $10 million in yearly revenue, under $10 million in assets and liabilities, and under 50 employees on staff. When a bankrupt company files chapter 11, they may make use of their bankruptcy attorney and find a solution.

If the bankrupt company has behaved honestly and fairly so far, they may be considered DIP, or debtor in possession, during the court case. This means that the debtor company is free to retain ownership of itself and continue its business practices, but with some conditions involved. The DIP company may not, for example, take on any new loans, nor may it purchase or sell any property outside of its regular business operations. This company also may not hire or retain any lawyers without the court’s permission. Violating these terms, or committing criminal acts, may result in a loss of DIP status.

Meanwhile, the debtor company’s finances may be audited and evaluated, and the debtor will be asked to create and present a reorganization plan. This is what it sounds like: a plan that will restructure and downsize the company so that it may more easily pay off its debts, and an attorney may be used to help create this plan. The debtor party may be given a few months’ time to do this, and it may request and receive a time extension if desired. Later, the plan will be presented to the court. If the creditors accept it, it may be set into motion. Such a plan may involve partially or wholly liquidating the debtor company to pay off the debt either in part or in full, to whatever extent is possible. Creditors may have to make do with a partial debt repayment.

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