What Happens When a Business Files for Bankruptcy?
Struggling to pay your debts? Read on to learn what happens when your business files for bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal declaration that confirms you are unable to pay back your debts. It is important to note that bankruptcy is only relevant to individuals and not companies. This process will clear the majority of your debts and have debt collectors cease contact with you. Bankruptcy will last 3 years and will remain on your credit report for a further 2 years. Information regarding your bankruptcy will also be entered permanently into the publicly accessible National Personal Insolvency Index (NPII).This may significantly affect your ability to obtain credit in the future.
How does Bankruptcy apply to your business?
There are two main ways in which bankruptcy can apply to your business. This is based on the structure you have chosen to operate under.
When your business operates as either a sole trader or partnership, an application for bankruptcy will apply directly to the owners as individuals. Technically, the business itself will not become bankrupt. As a result a registered trustee will be appointed in bankruptcy to manage your affairs. They will attempt to pay off your debts, and will often try to sell your assets in order to fund this. This may result in the sale or closure of your business in order to help clear your personal debt.
If your business is structured as a company and can no longer pay its debts, it will be considered insolvent. At this point there are a select amount of measures available to you as the company owner. If you are seeking to bankrupt your business, the first step will involve entering into voluntary administration. An administrator will be assigned to your company with the aim of keeping your business open and eventually paying back debts. However, this process is not always successful and does not guarantee a solution.
In this instance, you would then be placed into liquidation in order to fold the business. A liquidator will be appointed to your company to manage finances during the winding up process. They will determine whether your company has any assets that may be of value to your creditors. As a director of your company, the liquidator will also assess whether you have breached any of your duties.
Generally, at the end of liquidation your company won’t exist. Alternatively, it will be completely restructured. If you have not personally declared bankruptcy, you will remain liable for any company debts that you guaranteed. If you find yourself in a situation in which your business has no other choice than to seek bankruptcy, it may be of use to consult a bankruptcy lawyer to determine your best option moving forward.
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Chris is a member of the content team at Lawpath. He is currently studying a Bachelor of Business and Bachelor of Laws at UTS. He is interested in how marketing communication strategies can influence the future of legal technology.