What happens to a company's debt when it goes bankrupt?
I’ve been involved in several different bankruptcy cases with a business lawyer.
I’ll try to explain as best as I can.
When a company goes bankrupt in the United States, what happens to its debt depends on the type of bankruptcy filed and the specific circumstances of the case. In general, bankruptcy provides a legal framework for managing debts that a debtor cannot repay. There are several chapters of bankruptcy in the US, but the most common ones for businesses are Chapter 7, Chapter 11, and Chapter 13.
1. Chapter 7 Bankruptcy: In Chapter 7 bankruptcy, also known as liquidation bankruptcy, the company's assets are sold off to repay creditors. Any remaining debts that are eligible for discharge are typically erased. However, it's essential to understand that not all debts can be discharged in Chapter 7 bankruptcy. Certain types of debts, such as secured debts (backed by collateral) and certain priority debts like taxes and child support, may not be dischargeable. In such cases, the responsibility for paying off these debts may still exist, either through liquidation of assets or repayment plans.
2. Chapter 11 Bankruptcy: Chapter 11 bankruptcy is typically used by businesses to restructure their debts and operations while continuing to operate. In Chapter 11, the company develops a reorganization plan to repay creditors over time. This plan may involve reducing debts, renegotiating contracts, and restructuring the business. Creditors have a say in the approval of the plan, and if approved by the court, it binds both the debtor and the creditors to its terms. In this scenario, the responsibility for paying off the debt often remains with the company, albeit under adjusted terms outlined in the reorganization plan.
3. Chapter 13 Bankruptcy: While Chapter 13 bankruptcy is more commonly used by individuals, it can also be an option for sole proprietorships and small businesses. Similar to Chapter 11, Chapter 13 allows for the reorganization of debts and the development of a repayment plan. The difference lies in the eligibility criteria and the scale of the business involved. In Chapter 13, the responsibility for paying off the debt generally falls on the debtor, as outlined in the court-approved repayment plan.
The outcome of a company's debt in bankruptcy varies depending on the type of bankruptcy filed and the specific circumstances of the case. Debt may be discharged, renegotiated, or repaid over time under court-approved plans. In some cases, individuals associated with the company, such as owners or guarantors, may also bear responsibility for certain debts, depending on factors like personal guarantees and the legal structure of the business. Consulting with a bankruptcy attorney is crucial for understanding the implications of bankruptcy and navigating the process effectively.
I hope you’ve found this helpful. If you need help from a Utah or Nevada lawyer, try this one:
8833 S Redwood Rd
West Jordan UT 84088
(801) 613–1472
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