Every business starts with the best of intentions, but some businesses never reach financial success, and others that were once successful may eventually fail. The financial trouble can start slowly, at first by letting certain bills get paid late in order to pay others on time.
Soon, credit cards or other sources of credit are extended to cover operating costs. The hope of future increases in cash flow or the prospect of a financial windfall to pay the debts can keep this cycle churning, making financial conditions worse.
Debts beget more debts, and eventually the burden can become insurmountable unless something drastic happens. Many times, that means bankruptcy.
Bankruptcy is a governed by federal law, and bankruptcy cases from Napa County are handled through the United States Bankruptcy Court in the Northern District of California, at the bankruptcy court’s Santa Rosa courthouse.
Some people consider bankruptcy to be unethical, rewarding irresponsible business practices and harming the creditors who did nothing wrong. Other people see bankruptcy as a sensible approach to a very difficult problem.
The United States doesn’t have debtor’s prisons, and these issues must be resolved somehow. Donald Trump has famously used Chapter 11 bankruptcy multiple times with several casinos, and other companies such as PG&E, Chrysler and American Airlines have taken advantage of Chapter 11 bankruptcy as well.
It does not necessarily mean that the business will dissolve, close or even fail. As was the case with American Airlines, eventually the business may become successful again.
Depending upon the type of business and nature of its problems, there are different types of bankruptcy options available. While there are six types of bankruptcy under the Bankruptcy Code, most small businesses would most appropriately elect Chapter 7 or Chapter 11 bankruptcy.
Chapter 7 bankruptcy is a total liquidation and shutdown of a business. A business that enters Chapter 7 bankruptcy has no chance of continuing on. Chapter 11, on the other hand, is intended to give the business an opportunity to catch up, to repay most or all of its debts, and to get back on track to economic success and viability.
In Chapter 11 bankruptcy, a trustee is appointed by the court, and makes a plan for how to repay and reorganize the priority of existing creditors. The creditors and the court review the plan, and after approval of the plan the business may continue to operate, but be better able to pay debts over time and survive.
Creditors agree to Chapter 11 plans because it gives them an opportunity to be repaid in whole or in part, when otherwise they may not be likely to receive any payment at all. Chapter 11 plans are complicated, and may take a year to be fully developed and approved. Once approved, plans may be in place for many years after that.
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