What Happens When a Business Goes Bankrupt

Joe Schwartz

Joe Schwartz

Business Loans Editor |

Unfortunately, many businesses fail and go bankrupt, here’s what happens next.

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Not everything always goes according to plan.

Every day, companies declare bankruptcy after not generating money for an extended period of time or to reorganize the business if things aren’t going well.

But what exactly happens when a business goes bankrupt?

The first step in any bankruptcy scenario is filing the bankruptcy petition, as well as schedules. These state the company’s income and expenses, assets and liabilities, financial affairs and more.

If the bankruptcy is personal, then the Trustee program appoints the bankruptcy trustee, which gathers the business owner’s property and sells everything that is non-exempt property. They also use cash from this sale to pay the business’s creditors, and at the end, the bankruptcy court discharges the owner’s remaining debt.

In the case of business bankruptcy, personal bankruptcy can’t be filed. A corporation, partnership or LLC can do it, but there won’t be a discharge of its debts received.

If the company files a chapter 11 bankruptcy, then it will reorganize under a court-appointed trustee and make a plan of how it will deal with the creditors. After creditors vote on the plan, the court decides if it’s equitable and fair, then they will give the approval.

Who Owns the Business’s Assets?

Who comes in charge of the assets depends on the type of bankruptcy. In the case of business or personal bankruptcy, for example, a trustee is appointed to take possession of the assets and distribute them among creditors. In the case of Chapter 11, the debtor is the one coming in possession of the assets.

Bankruptcy can happen at any time, depending on several factors. It is important to be informed and know what happens in such a case, and even more important to take steps that steer your business far away from bankruptcy.

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