Top Three Things Every Business Owner Should Know About Bankruptcy

Bankruptcy is a fact of life in business. Even if a business owner never faces his own bankruptcy, a business will likely encounter the effects of the bankruptcy of a customer or supplier at some point. Bankruptcy is an often complex area of the law, and there are a few things that every business owner should know:

1. There are different types of bankruptcy.

Businesses are able to file for bankruptcy either under “Chapter 7" or "Chapter 11.” In a chapter 7 bankruptcy, a court trustee is appointed to handle the liquidation of the entire business and shut it down. In a chapter 11 bankruptcy, the business is able to maintain control of the day to day ongoing operations of its business in an attempt to reorganize its affairs and keep the doors open.

2. Bankruptcy imposes an automatic stay on collection efforts.

If a business that owes you money files bankruptcy, you cannot ask for repayment, sue them or repossess their property. If you were in the process of a collection activity, you have to stop. Under certain circumstances, the bankruptcy court will grant you permission to proceed with collection efforts.

3. You might be able to get paid through the bankruptcy process.

A bankruptcy doesn't necessarily mean that you will never be paid the money a business owes you. You may have an opportunity to file a "proof of claim" in a bankruptcy that details what you are owed. In some situations, your proof of claim may even be ”allowed” indicating that you are entitled to payment from the assets of the business filing bankruptcy. These payments are typically administered by the bankruptcy trustee. 

Knowing your business’ rights when a customer or supplier files bankruptcy could be the difference between getting paid or coming up empty-handed.