Bankruptcy Law… Explained

No person or business owner plans on going into debt to the point where their business may fail or close down regardless of geographical density. If this happens, then a business may need to file for bankruptcy through a Bankruptcy Court. According to business law and bankruptcy law under Title 11 of the Bankruptcy Code there are two general forms of bankruptcy: liquidation and rehabilitation.

There are also different names for what type of bankruptcy can be filed, such as Chapter 7, 11, 12 or 13. When a company or person in debt files for bankruptcy, they reorganize or liquidate everything they have in order to pay back the people and companies that they borrowed from. The whole process is supervised by the courts that also provide some financial relief to the company or person in debt.

Liquidation or Reorganization – What’s the Difference?

There’s a big difference between reorganization and liquidation in business law. For example in a Chapter 7 bankruptcy, creditors are paid through a liquidation process. Basically, the person or company in debt has to give up all the property they own to escape debt. Whatever they have is usually sold for cash and that money is distributed to the different creditors. Unfortunately, this results in the closing of a business.

On the other hand under Chapter 11, 12 or 13 bankruptcies where the process begins with ‘reorganization,’ a business may stay open. In these cases, the creditors think that the company is more valuable in terms of potential future earnings than their actual liquid assets. That means they think they’ll ultimately get more money from trying to fix the company’s problems than they would if they simply took the cash value of what the company has left right now.

With court approval, the debtor or company in trouble works out a new payment plan with the creditors. It’s referred to as reorganization in part because this is often the stage where companies make radical changes in order to stay open. You could also think of it as rehabilitation – mistakes have been made but there’s a chance things could get better. If the credit plan falls through, that same company may find itself filing later for bankruptcy that involves liquidation.

When is Bankruptcy Criminal?

Not every bankruptcy situation is a civil. There are some circumstances where people or companies have been irresponsible to such an extent, that it’s actually criminal. Criminal offenses can also occur during the bankruptcy process itself by not being honest with the courts, and in some cases, even destroying evidence.

Here are some examples of criminal bankruptcy offenses:

• Malicious bankruptcy may occur when someone abuses the process by wrongfully petitioning to have another person or company pushed through the bankruptcy process, even though they don’t actually meet the legal bankruptcy requirements.
• Bankruptcy crime occurs when a trustee steals from the debtor’s bankruptcy case.
• Bankruptcy fraud involves intentionally withholding, concealing or destroying assets and falsifying documents to defeat bankruptcy provisions.

To get an idea about what potential offenses might be involved in a specific situation, you should speak to a business law expert who can provide all the detailed information that is needed. Same goes for noncriminal bankruptcy proceedings. Business law can be very detailed and confusing. The best way to get the right advice is to seek an attorney.

Not in Bankruptcy But Need Advice?

A lot of factors can influence what a business’ future might hold. For example, the greater the density of population where your business is located can equate a higher success rate. The lower the density of the overall geographical area may have a negative impact. If you are not sure where your business is headed, seek legal assistance from an expert in business law who can help you to understand what the legal ramifications are.