Businesses may declare bankruptcy for many reasons. At its core, the basis for corporate bankruptcy is simple: the organization cannot pay its bills and has become insolvent. There are two main types of insolvency:
- Cash flow insolvency: For some reason, the business’s cash flow is not sufficient to pay its bills on a short-term basis, and it cannot achieve the cash to make up for this shortfall.
- Balance sheet insolvency: The company has more liabilities or debts than assets, so it is “underwater” in the longer term.
A company may experience one or both types of insolvency before becoming bankrupt. The problems it faces will shape how the bankruptcy process goes.
The other factor shaping the process is the type of filing a company chooses. Since 2019, there have been three ways businesses can file for bankruptcy in Florida.
Chapter 11 Bankruptcies
Chapter 11 of the U.S. Bankruptcy Code is the most common method for commercial bankruptcies in Florida. Also known as a “reorganization” filing, this method allows the company to remain in operation despite being insolvent.
The goal of a Chapter 11 filing is to allow the organization to restructure its obligations and cover its debts while continuing to bring in revenue. Organizations may propose plans to improve their financial standing, including:
- Downsizing operations
- Liquidating assets
- Renegotiating debts
If the court accepts the reorganization plan, it may go forward. Until the proceedings are complete, the business may not take on new loans, sell assets, or change business operations.
Subchapter V Bankruptcies
In 2019, Subchapter V was added to the Code. It provides a simpler alternative to Chapter 11 filings for small businesses. A business is eligible if it has less than $7.5 million in debts and at least 50% of the debts directly arose from the company’s commercial activities.
Under this subchapter, there are fewer administrative requirements, and businesses retain more autonomy. Additionally, it protects owners who have used home mortgages to fund their businesses.
Chapter 7 Bankruptcies
Sometimes, a business may not choose to remain operational once it declares bankruptcy. In this situation, it may be preferable to file under Chapter 7.
Chapter 7 is for liquidation. In this case, the debtor business will sell its assets to cover debts. This is typically preferable for companies that experience cash flow insolvency, as the assets can fully cover the liabilities. However, it may not be the best option for organizations facing balance sheet insolvency because they do not have the assets to cover their liabilities, and debts will remain.
How to Manage a Corporate Bankruptcy in Florida
If bankruptcy may be an option for your business, it is important to understand how the process works. Here’s what your organization must do as you prepare to address your insolvency.
- Talk to a Business Attorney: Going bankrupt places a heavy burden on any business. Talk to a skilled corporate attorney to discuss why you are considering it and ensure you understand the process.
- Assess Your Options: Your attorney will help you determine if going bankrupt is best for your business and, if so, which alternatives are the most effective for resolving the organization’s issues.
- File a Petition: Your lawyer will work with you to understand your company and draft a complete petition for bankruptcy in federal court.
- Submit a Reorganization Plan: If you choose to file under Chapter 11, you will have a limited period to submit your preferred reorganization plan. Your legal team will help you draft one that meets federal standards while still achieving your goals.
- Acquire Post-Petition Support: Many elements of reorganization require funding. You will work with your attorney and potentially a bankruptcy trustee assigned by the court to determine the best way to fund these efforts.
- Fulfill the Plan: With appropriate funding in place, you will follow the plan’s terms to organize your company more effectively and negotiate and pay creditors according to order of precedence.
Talk to EPGD Business Law About Your Concerns
Any company can become insolvent in the wrong circumstances. If your business is struggling, you don’t necessarily need to shut it down. Instead, talk to the experienced attorneys at EPGD Business Law. Our skilled team can help you understand your options for bankruptcy and what’s best for your circumstances. Get in touch today to discuss your situation and learn more about how we can help.
