Bankruptcy happens every year, and many small companies or wealthier individuals may find themselves declaring bankruptcy for any number of reasons. A number of “chapters” for a bankrupt party exist, ranging from chapter 13 to chapter 7 to the common chapter 11 forms of bankruptcy. When a party is bankrupt, it may hire a bankruptcy attorney from a bankruptcy law firm, and go to a court of law to find debt relief. At such a court, the bankrupt party will work with its creditors and the judge to figure out a practical solution for debt repayment, and this can do a lot of good for the bankrupt party. No one relishes the idea of going bankrupt, but then again, being bankrupt doesn’t have to mean “broke and hopeless.” A court of law may provide a solution, one way or another. How might this work? Should a bankruptcy lawyer be hired?
Why Companies Go Broke
Why might a company find itself bankrupt? A bankrupt company may be unable to pay its debts for a number of reasons, some of them due to external problems. A bankrupt company is one that announces its inability to pay off its debts with its current state of financial affairs, and in some cases, this happens due to the business’ consumer base drying up. In other cases, a company may go broke because of taking out bad and ill-advised loans or other misguided business practices.
Crime, both internal and external, may be a common reason why companies go bankrupt. Internally, a company may have a white collar criminal who is embezzling money (or several), and this can lead to losses. In other cases, someone is committing what is called stock broker fraud, when someone falsifies or distorts stock information for personal gain. This can trick investors into making bad financial decisions, and in some case this might drive a company into bankruptcy. If such crimes are suspected, a company may undergo an audit to determine how much money was lost, and possibly determine who was responsible for those crimes.
Crime may also be external, and it can be vicious. Cyber crime is on the rise, which is when hackers and other dishonest computer users illegally break into a company’s computer mainframe and Cloud data storage to steal information. Bank account numbers, social security numbers, passwords, client data, and more may be stolen in this manner, such as through hacking or computer viruses, and this may result in the loss of millions of dollars or more in some cases. Larger companies may take a serious loss, and smaller ones will be driven to bankruptcy.
Handling Bankruptcy Court
A bankrupt party, such as a company, will file for the correct chapter of bankruptcy, and chapter 11 bankruptcy is a common model. Chapter 11 is often used by companies with fewer than 50 employees, under $10 million in annual revenue, and under $10 million worth in assets and liabilities. Such a company may also reach out to a bankruptcy law firm and hire lawyers to represent them in a court of law to protect their interests. Such lawyers may use their expertise to prevent abuses dealt to their clients.
During this time, the bankrupt party may undergo an audit to determine the extent of its debts and total of its revenue and the value of its assets. The debtor, if it has behaved honestly and fairly so far, may be considered DIP, or “debtor in possession.” This allows the debtor to remain open for business and own itself, but with conditions. The DIP party may not hire lawyers, take on new loans, or buy or sell property outside of its normal business practices without permission. Violating those terms, or committing a crime, may cause DIP status to be revoked.
The debtor will be given time to form and later present a reorganization plan, one that may restructure and downsize the debtor company to make debt repayment easier. If the plan is accepted, it will be set into motion, and this may involve partially or even completely liquidating the debtor to allow debt repayment. In some cases, even total liquidation results in only a partial debt repayment, and creditors will have to make do with what they get.