Is your business underwater? Do you feel like you are drowning? There's hope in the bankruptcy process, and your business can emerge from bankruptcy.

Case in point: In April 2014, the iconic New York City restaurant Tavern on the Green re-opened its doors after a five-year hiatus. The restaurant lost its lease in 2009, closing January 1, 2010, and declaring Chapter 11 bankruptcy. But now the restaurant is back, under new management.


 

The bankruptcy process. A business declares bankruptcy by filing a petition with the bankruptcy court in the district where the business is located. The filing is accompanied by documents showing the business assets and liabilities, and its obligations to creditors. Some personal property may be exempt from the bankruptcy process, but most business property must be included in the bankruptcy.

In a Chapter 7 bankruptcy, the debtor must put together a plan for how secured debts (those for which there is collateral) will be repaid. All debts of the business are included in the bankruptcy process, and creditors are repaid based on a specific priority. If there is enough money left after all the assets are sold and secured creditors are paid, the unsecured creditors may be paid. In a Chapter 7 business bankruptcy, no assets are exempt from the process, while in a personal Chapter 7 some debts are not included. For example, student loan debt and taxes must still be paid.

In a Chapter 11 bankruptcy, the filing process is similar.

In most cases, the debtor can manage the process of reorganization, but in some cases a trustee may be appointed.

Emerging from Bankruptcy

The process of getting out of bankruptcy is commonly termed "emerging," like a butterfly emerging from a chrysalis. In most cases, the company is the same, but changed.

The business emerges from bankruptcy when a court grants written approval, called "discharge." A discharge is a form letter that explains that the business doesn't have to repay its creditors.

Types of bankruptcy and Discharge

Chapter 7 bankruptcy is liquidation, so it's not not common to discuss emerging. In this case, the corporation is dissolved, with the assets sold under the watchful eye of a trustee, in order to pay creditors.

Chapter 11 bankruptcy is reorganization. In this case, the business goes under the control of a trustee, who manages the business with the intent of paying off creditors and trying to get the business out of bankruptcy and back to work. The business continues to operate and works out a plan to pay back creditors.

In Chapter 11, a business can emerge and continue. This was the case with Delta Airlines, which filed Chapter 11 bankruptcy in 2005, and exited the bankruptcy process in May 2007. A 2007 article in USAToday explained the company's rapid return:

Delta's relatively swift, successful turnaround is attributed to skillful lawyering, management focus and lessons learned from other airlines.

 
Chapter 13 bankruptcy combines personal and small business (sole proprietor) bankruptcy. In this case, the debtor must make monthly payments during the bankruptcy process. Once the payment plan period has ended, all other debts are wiped out, except those that are exempt from bankruptcy, like student loans and tax debts.

Discharge vs. Dismissal

The most common resolution for a business bankruptcy is discharge. But in some cases, the bankruptcy is not discharged, but is dismissed. In these cases, the debtor is still responsible for paying its debts. Dismissal is the result of failure to file the appropriate paperwork or not following the court procedures.