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Why Bankruptcy?

Updated: Aug 25

In this post we will talk about the benefits of claiming bankruptcy!

Bankruptcy offers numerous benefits to the company, and management, the greatest being a "time out" that gives the company a chance to breath by temporarily stopping all debt collection efforts.

Creditors may also institute bankruptcy (under the correct conditions) in order to prevent the company from taking actions that would be unduly prejudicial to the creditors.

Bankruptcy is final. The company is either ended or "repaired," emerging from bankruptcy with a new lease on life. Particularly, in the case of the business being ended, the opportunity for starting fresh, with no entanglements or hold-overs from the old company provides an opportunity to start a new business without any history.

THE "QUIETING DOWN" EFFECT

The "quieting down" effect refers to the temporary prevention of creditors collecting their debts. Without the worry of creditors seizing assets or filing suit, the debtor can "quietly" asses their situation and plan a recovery. As creditor disputes are subject to the bankruptcy process, they may also "quiet" pending decisions made by the bankruptcy court.

Quieting down is a result of several factors:

  1. Upon filing the bankruptcy petition, the bankruptcy stay stops all private attempts to collect against the Debtor.  

  2. Upon filing, all control over the administration and disposition of debtor's assets and debts either immediately transfers to the exclusive authority of the bankruptcy trustee or, is subject to the scrutiny of the bankruptcy court and creditors.  

  3. All of the creditors' private agreements and disputes become subject to the rule of the bankruptcy process, not the Debtor.   

  4. Ultimately, the bankruptcy process will resolve all claims and disputes against the company, often at a vastly lower financial and emotional cost to all involved.

UPON FILING BANKRUPTCY:

  • Lawsuits against debtors cannot proceed until authorized by the bankruptcy court (Often, the issues driving the lawsuit can be resolved within the bankruptcy case, helping limit the ongoing costs of litigation) 

  • Creditors cannot take items back from the debtor and Landlords cannot lock-out the debtor from the property that they occupy until authorized to do so by the bankruptcy court

  • Disputes over which creditors should be paid first are decided by the bankruptcy court

  • The bankruptcy court may examine certain payments made by the management prior to filing and reverse any payments deemed not to be proper  

  • The secondary liability of the managers is prevented so long as the manager has no independent liability



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