A Useful Guide: What Happens When A Company Declares Bankruptcy?

“Business Bankruptcy” isn’t a term you hear every day, but it’s something that could happen to any company. In the United States, business bankruptcy filings reached a seven-year high in 2016. When a company declares bankruptcy, it effectively declares that it cannot pay its debts. It can have serious implications for the company and its creditors, so it’s essential to understand what happens in this situation.

In this blog, we will discuss what happens when a company declares bankruptcy.

  1. File A Petition

First, the company files a petition to bankruptcy courts. If the company is filing for bankruptcy, it must conform to the court’s requirements. Whether the company cannot pay debts or decides to restructure its business, it must first file a petition with the court. If the company files for a Chapter 7 bankruptcy, it will be liquidated, and all of its assets will be sold off to pay creditors. If the company files for a Chapter 11 bankruptcy, it will reorganize its business and try to repay its debts over time.

  1. Appoint A Trustee

Once the company has filed for bankruptcy, a trustee will be appointed to oversee the liquidation process. The trustee’s job is to ensure that the company’s creditors get paid as much as possible. If you’re located in Hong Kong, the trustee may sometimes be responsible for selling the company’s assets after declaring company bankruptcy in Hong Kong for various reasons; for instance, if Chapter 7 bankruptcy is filed, the trustee is answerable for liquidating the company’s assets.  However, if Chapter 11 is filed, the trustee will oversee the company’s reorganization.

  1. Notify Creditors

Once the bankruptcy petition has been filed, the company must notify its creditors by sending a notice to each creditor or publishing a notice in the local newspaper. The notice must include the date of the bankruptcy filing, the name, and address of the bankruptcy court, and the trustee. In the case of Chapter 7, the notice will also include a date by which creditors must file their claims. While in Chapter 11, the notice will have a date by which creditors must vote on the company’s reorganization plan.

  1.  File Bankruptcy Schedules

The company will also have to file several bankruptcy schedules with the court. These schedules detail the company’s assets, liabilities, and income. These schedules also list the creditors that the company owes money. If Chapter 7 is filed, the schedules must also list the value of the company’s assets; however, in the case of Chapter 11, they do not have to list the value of the company’s assets.

  1. Have A Meeting Of Creditors

Once the schedules have been filed, the trustee will convene a meeting of creditors. At this meeting, the trustee will review the bankruptcy schedules and answer any questions that creditors may have. This meeting is also an opportunity for creditors to object to the company’s reorganization plan if one has been proposed. This only applies to Chapter 11 bankruptcy since Chapter 7 bankruptcy does not have a meeting of creditors.

  1. Obtain Court Approval

The court must approve the company’s petition and schedule for the bankruptcy to proceed. The court will also review any objections that creditors may have raised. The court will issue an order of relief after the approval of bankruptcy that outlines the bankruptcy terms and specifies what the company can and cannot do. Chapter 7 and Chapter 11 bankruptcies both require court approval.

  1. Disclose Reorganization Plan 

If the company has filed for Chapter 11 bankruptcy, it must disclose its reorganization plan to creditors that outlines how it will repay its debts and reorganize its business. Chapter 7 and 11 bankruptcies require the disclosure of a reorganization plan. 

  1. Make Payments

Once the bankruptcy is approved, the company will begin making payments to its creditors and the payments will be made via the trustee. For Chapter 7 bankruptcies, the payment will be made through the liquidation of assets owned by the company, while in Chapter 11, the payments will be made from the company’s income.

  1.  Obtain Court Permission

The company may sometimes need court permission to take certain actions. For instance, a business may require approval from the court to borrow money or sell assets. Chapter 7 bankruptcies do not require court permission for these actions, while Chapter 11 bankruptcies do.

  1. Receive Discharge

Once the company has made all the required payments, it will receive a discharge from the bankruptcy court. This discharge releases the company from its debts and allows it to begin operating again. For both Chapter 7 and Chapter 11 bankruptcies, a bankruptcy court discharge is required.

The things mentioned in this blog are pivotal when considering filing for bankruptcy. It is essential to be aware of the different kinds of bankruptcy and its consequences. Bankruptcy negatively affects your credit score and hinders your ability to get credit in the coming years. However, it can also relieve debt and allow you to start fresh. 

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