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Corporations and LLCs are legal entities that exist independent of the people who own or run them. A company filing bankruptcy may impact owners, shareholders and management. Bankruptcy can substantially impact the interests of various parties associated with the company.
There may be many benefits to declaring bankruptcy.
Business bankruptcy offers two options for relief:
1. Reorganization - Changing to the business to make it more viable.
2. Liquidation - Windup and shut down the business.
There are situations in which restructuring debts and reorganizing the business could enable the business to return to profitable operation. In such cases, bankruptcy provides both a “time out,” which prevents creditors from attempting to collect amounts due, as well as an “umpire” who can force creditors to cooperate in the process and get the business back on its feet. Chapter 11 of the Bankruptcy Code provides for reorganization; they provide the difference between success and failure for a business.
Liquidation is initiated by filing under Chapter 7, at which time control of the business and
management of the assets transfers to the Chapter 7 trustee, thereby relieving the management of
control over the business.
The trustee will liquidate all unsecured assets, investigate all claims, and
pay all approved claims fairly and impartially to the extent possible; afterwards, the business will
be shut down.