With the declining economy, bankruptcy filings are on the rise. The bankruptcy trend in the past few years has hit both residential and commercial developers, as well as general and subcontractors. This trend has impacted all facets of the construction industry—virtually all trades, vendors and suppliers. Frequently, businesses find themselves in trouble because their own clients fail to pay their bills timely or themselves filed bankruptcy. Cash flow is key in any business, but it is particularly important in construction businesses. Those in the construction industry faced with slow paying customers, receivables that become non-collectible, pressure from banks and reduced demand for their services, often find themselves considering bankruptcy.
You should be aware of the various options that businesses have in connection with bankruptcy. Generally, businesses can file for two types of bankruptcy protection: Chapter 7 and Chapter 11. When a business files bankruptcy, either Chapter 7 or Chapter 11, an automatic stay is created which prohibits creditors from pursing any actions against the business debtor to collect a debt or pursue a claim.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, a trustee is appointed and typically immediately shuts the business down. Thereafter, the trustee may perform a liquidation of the business assets and pay creditors from the liquidation proceeds. Once the trustee has liquidated the business and paid creditors, the bankruptcy case is typically closed but the business debtor does not receive a discharge of its remaining debts. However, the business is usually dissolved following the liquidation as there is nothing left for the benefit of creditors. The length of a business Chapter 7 bankruptcy varies depending on the trustee’s analysis of the case, the time to sell assets and time to pay creditors, but could range from 6 months to a year.
Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, the business debtor can often stay in control and avoid the appointment of a trustee. The goal of a Chapter 11 bankruptcy is to get the court to approve a Plan of Reorganization that provides new terms upon which the business debtor will pay back its creditors, often at a fraction of the original amount. In the Plan, Chapter 11 debtors can extend matured loans; pay certain creditors less money than is owed; reject leases; and even possibly adjust interest rates on loans to the current market rate. Once the court approves the Plan, it rewrites the deal with the businesses’ creditors and the business emerges from the bankruptcy intact. Keep in mind that a Chapter 11 bankruptcy is a complicated, expensive and time consuming process. As a result, it is important to consult a bankruptcy professional and consider all of your options before filing a bankruptcy.